Laddering Insurance Policies

Buying life insurance can be intimidating, because it forces you to face some tough realities when you would rather be thinking, “It won’t happen to me.” Unfortunately, death and injury happen, and when they do, it’s a tragedy. When a family has to deal with an emotional trauma like the death of a family member, life insurance enables them to avoid financial hardship and make sure the bills get paid.

We’ve talked about life insurance before, but some of the motivating factors to get life insurance are:

Keeping your home
Paying the monthly bills
Sending your kids to college
Keeping the family business afloat to be passed on to the next generation, or to ensure a fair sale

Have you ever heard of laddering life insurance policies? Laddering life insurance policies means you buy several life insurance policies over a period of years or even decades. Ideally, you’ll have complete life insurance coverage during the times of your greatest future expenses, typically when children are growing up and going to college. After your children leave home, your expenses will likely decline, and so you will probably need less insurance coverage. Laddering insurance policies can help you get the right amount of life insurance to cover your different needs at different times and save you money by not paying for life insurance premiums you don’t need.

Once you’ve discussed with your insurance agent or financial planner your family’s needs, how much life insurance is enough, and for how long you’ll need it, you can develop a budget for the time frame. This could help reduce the cost of insurance over the policy period for which you are purchasing.

For example, let’s say you have three kids in grade school and a mortgage. Your needs are going to change drastically over the next twenty years.

You might need $2,000,000 to cover income, college tuition, and a mortgage, but you need that for a staggered time period until your three kids are in college and your mortgage gets paid over the course of thirty years. You might consider purchasing the following plans:

A ten-year term life insurance policy with a $750K face amount
A fifteen-year term life insurance policy with a $500K face amount
A twenty-year term life insurance policy with a $500K face amount
A whole life policy with a $250K face amount, for final expenses and minor remaining debt obligations

For ease of cost comparison, we will focus on the term insurance only.*

If we take a forty-four-year-old male who is in preferred health and quote him a thirty- year term policy, the premium would be approximately $3,140 annually.

If the insured was to ladder the policies as in our example, the premiums would be as follows:

Ten-year term life insurance policy with a $750K face amount = $590 annually
Fifteen-year term life insurance policy with a $500K face amount = $505 annually
Twenty-year term life insurance policy with a $500K face amount = $690 annually

That comes to a total of $1,785 annually—a savings of $1,355, or 43 percent.

Check with your agent in your state on which carriers provide multiple policy discounts and incentives when employing a laddering strategy. Remember: life insurance is not just about you; it’s about your family.

*Cost comparison was done assuming New York State and specific to one carrier. Premiums vary between insurance companies. Health class is based on health history, family health history, and blood work after review of physical exam and medical records.

Linda Rey is a licensed insurance agent at Rey Insurance with a broad spectrum of expertise in life, accident, health, property and casualty insurance as well as retirement planning and college funding strategies.

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