How to use the ladder strategy to save on life insurance

Life insurance is a useful tool that can help provide financial security for you and your family. It can, however, be expensive, especially as you get older. The ladder strategy aims to address this issue by giving you the maximum amount of life insurance coverage at the best rates. Laddering typically involves purchasing several term life policies with staggered expiration dates. This can be cheaper than buying whole life insurance, and having multiple policies allows changes over time. Bankrate’s insurance editorial team dives a bit deeper and explains how the laddering strategy works so you can decide if it’s right for you.

What is the ladder strategy?

The ladder strategy involves purchasing multiple term life insurance policies with staggered end dates instead of relying on one large policy to cover all your needs. This approach is designed to align with the reality that most people’s financial obligations decrease as they age. As kids grow up and become independent, your mortgage balance shrinks and your retirement savings grow, the need for extensive life insurance often diminishes.

By laddering policies, you can reduce the risk of being overinsured and paying higher premiums for coverage you no longer need. As your financial responsibilities lessen, shorter-term policies drop off, leaving you with just the right amount of coverage — and lower costs — at each stage of life. This strategy offers flexibility and can be a smart way to ensure you’re only paying for the protection you truly need.

How to ladder your life insurance

Now that you know what laddering is, let’s look at how this strategy can actually work. The idea is to align your life insurance coverage with your financial needs at different stages of life, ensuring you have the right amount of protection when it matters most, without overpaying for coverage you don’t need later on.

Before we move on, it’s important to note that the quotes referenced below are for illustration purposes only. Life insurance is very individualized and rates will vary greatly from one person to another.

Let’s walk through a real-world example to see how laddering can help a 32-year-old married parent, with a mortgage and a growing family, manage their life insurance costs over time:

• $1 million 10-year term policy: In the early years, the family’s financial needs are highest with young children and a large mortgage. This policy provides maximum protection when the family is most vulnerable. After 10 years, this coverage will drop.
• $500,000 20-year term policy: Adding this policy ensures $1.5 million in total coverage during the first 10 years and $500,000 during the second decade. It drops off as their children reach their 20s and are less financially dependent on their parents.
• $100,000 30-year term policy: With this policy in place, the total coverage reaches $1.6 million during the first decade, then decreases gradually over time. As the policy owner reaches his 60s, he will still have this $100,000 policy which can help his spouse should he die prematurely.

Here’s how the monthly costs could look for this 32-year-old healthy male:

• $1 million 10-year term policy: $18.70 per month
• $500,000 20-year term policy: $19.55 per month
• $100,000 30-year term policy: $14.28 per month

In total, the monthly premium is $52.53 for the first 10 years, which then decreases as policies expire. If they had opted for a single $1.6 million 30-year policy, the cost would likely be much higher over the entire term. In fact, here’s how those costs would compare over 30 years.

The laddering strategy, as outlined in the table, clearly showcases significant cost savings over time compared to opting for a single long-term policy. By purchasing multiple policies with staggered term lengths, the total cost over 30 years is significantly lower than committing to a $1.6 million 30-year policy. Specifically, the laddering strategy totals around $12,077, whereas the single 30-year term policy would cost $32,252 over the same period. This results in a savings of approximately $20,175 by utilizing the laddering approach. Not only does this method offer tailored coverage to match the insured’s changing financial needs, but it also provides a far more cost-effective solution.

How you can save money with the ladder strategy

The ladder strategy helps save money not because of any discount for multiple policies, but due to the structure of how the coverage is set up. By breaking up your coverage into smaller, staggered policies, you’re matching the insurance to your life stages and needs, which is generally more affordable than holding a single, large policy for an extended period.

A single long-term policy, like the $1.6 million policy discussed earlier, would require higher premiums because it provides continuous, large coverage over 30 years. On the other hand, laddering policies reduces the cost over time. In the first 10 years, you might carry $1.6 million in coverage with three separate policies, but as the larger policies expire and your financial needs decrease, you’re left with more manageable coverage and a lower monthly payment.

By aligning your life insurance with your changing financial responsibilities, you avoid being overinsured and save money in the long run, all while ensuring your loved ones are adequately protected during the most critical periods of your life.

Consider how much life insurance coverage you need

Determining how much life insurance you need is a crucial step in making sure your loved ones are financially secure if something happens to you. A common approach is to estimate the total amount of coverage based on your current financial obligations and future needs. There are two primary methods to help you calculate this:

• The DIME formula: This approach looks at four key factors — debt, income, mortgage and education. You calculate the total by adding up your outstanding debts, the income replacement your family would need, the remaining mortgage balance and the cost of future education for your children.
• 10x income rule: A simpler method is to multiply your current annual income by 10 to get a rough estimate of how much life insurance you may need. While this doesn’t consider every financial detail, it provides a quick snapshot of the coverage you may want to explore.

For more accuracy, using a life insurance calculator to assess your unique financial situation can help you get a clearer picture of the coverage amount you should aim for.

Who should use the life insurance ladder strategy?

Laddering life insurance policies can be a cost-effective way to ensure financial protection, but it’s not always the best fit for everyone. If your financial needs are stable and predictable, such as having long-term responsibilities like supporting dependents or paying off a mortgage, laddering may make sense. However, if you aren’t comfortable forecasting your financial needs decades into the future, a single, long-term policy could provide more peace of mind and simplicity.

Laddering may also not be ideal for individuals who expect their financial responsibilities to remain high over time. For instance, if you have ongoing financial obligations that won’t decrease, like caring for a dependent with special needs, maintaining consistent coverage through one comprehensive policy could be a better approach.

Alternative to laddering life insurance

While laddering life insurance is a strategic way to tailor coverage to your changing financial needs, it’s not the only option. Some insurance companies allow policyholders to decrease their coverage amount, or face value, as their financial responsibilities decrease later in life. This option can offer similar benefits to laddering, like lowering your premiums as you age, without needing to manage multiple policies.

However, not all insurers offer this flexibility, so it’s important to check with your provider to see if reducing your coverage is possible with your current policy. This alternative might be simpler for those who prefer the convenience of sticking to a single policy rather than managing multiple term policies over time.

Review your life insurance policies regularly 

Reviewing your life insurance policies on a regular basis with both your family and your insurance agent is an important step in ensuring that your coverage remains aligned with your changing financial needs. Life circumstances can shift, and policies that worked for you initially may no longer provide the right level of protection. 

Here are key aspects to look at when reviewing your life insurance coverage:

• Conversion expiration dates: If you have a term policy with conversion options, make sure to note the expiration date for converting it to permanent life insurance.
• Beneficiaries: Regularly update your beneficiaries to ensure they reflect your current wishes, especially after life events like marriage, divorce or the birth of a child.
• Term policy expiration dates: Keep an eye on when your term life insurance policies are set to expire, so you can plan ahead for future coverage needs.
• Policy riders: Review any riders, such as waiver of premium or accidental death benefits, to ensure they still make sense for your situation and needs.
• Premium costs: If you have laddered policies, evaluate if the premiums are still affordable and if reducing coverage or adjusting your strategy might be beneficial.

By staying on top of these key points, you’ll be better equipped to maintain a life insurance plan that fits your financial goals and provides the right protection for your loved ones.

Frequently asked questions

• What is the best life insurance company?
  

  To determine the best life insurance company, you should consider your financial needs, age, income and other factors that will impact the type of policy you need and how much it might cost. Consider what’s most important for you in a life insurance provider, such as the company’s customer satisfaction ratings or the availability of riders for optional coverage. Once you determine your financial needs and what features are important to you, compare quotes from a few different companies to find which ones could be the right fit.

• What is the difference between whole life and term life?
  

  Whole life insurance is a permanent life insurance policy that covers you for your entire life, provided you pay your premiums. Coverage typically lasts until ages 95 to 121, depending on the insurer. Whole life policies also come with a cash value component that grows over time, which you can borrow against or use in certain situations.

  However, whole life insurance tends to be more expensive than other options. Term life insurance, on the other hand, offers coverage for a specific period, usually ranging from 10 to 30 years, with a few insurers offering 40-year terms. It’s generally more affordable than whole life, but once the term expires, the coverage ends unless renewed or converted.

  Both options have their advantages, and speaking with a licensed life insurance agent can help you determine which policy best fits your long-term needs.

• What is the best strategy when shopping for life insurance?
  

  Like most financial products, the best strategy when shopping for life insurance is different for everyone, but the key thing that will most likely ensure success is preparation. Take your time and do a little research on companies and policy types; consider using a life insurance calculator to give you a rough estimate of how much life insurance you need. Then talk with a professional, such as a certified financial planner or licensed life insurance agent to see if there is anything you are forgetting before you start requesting quotes.