How to Make Laddering Life Insurance Work for Your Family

You’ve decided you need to purchase term life insurance for your family, but how much? For how long? And why would you need to purchase multiple life insurance policies? 

This article will explain how to save money and ensure your family’s financial stability by “laddering” different term life insurance policies with varying coverage terms.

What is “Laddering?”

“Laddering” is the term used to describe purchasing several life insurance policies having varying amounts of coverage and different coverage terms. A policyholder will ladder policies to save money on premiums while providing enough coverage to meet their financial needs at various times in their life.

For example, let’s say that a young couple with a baby purchases a home and decides to purchase life insurance coverage to provide replacement income and meet financial obligations should something happen to the primary breadwinner. They have a mortgage in the amount of $400,000 and a child’s care and education to fund. 

They estimate that their baby needs $500,000 in coverage, and the mortgage is for 30 years so that they could purchase a $900,000 30-year policy. The premiums will be expensive, and the couple will have to pay them for 30 years. 

In the alternative, by purchasing three different term life insurance policies at once and laddering them, this couple can get the coverage they need when they need it and save money on premiums as policies expire.

Policy 1: $300,000 for 10 years

Policy 2: $300,000 for 20 years

Policy 3: $300,000 for 30 years

For the first ten years of coverage, the family is covered in an amount that pays for the mortgage entirely and supports their baby as the baby grows into a toddler then a young child. 

When the child turns ten, the couple has been paying down the mortgage for ten years and owes less. Policy 1 expires, but the couple still has Policy 2 and 3 providing $600,000 in coverage to pay off the mortgage and pay for the child’s continued needs and college. 

Once the child turns 20 and presumably is attending college, the couple has been paying down their mortgage for 20 years and owes much less. Policy 2 expires and Policy 3 remains in effect, providing $300,000 in coverage until the mortgage is paid.

As the policies expire, the couple saves money by not paying those premiums, yet they still have the amount of coverage they need when they need it.

When is Laddering Life Insurance Appropriate?

Laddering term life insurance policies is appropriate when you have children or others who rely on you financially or when you make a significant expenditure such as real estate. Over time, as people age and a mortgage is paid off, you will require less coverage. 

If you have fixed life insurance needs, such as wanting to leave each of your children $100,000 or some other amount, or you want life insurance just to pay for your end-of-life expenses, then laddering multiple policies is not appropriate.

How Do I Ladder Life Insurance Policies?

First, you must determine the amount of coverage you need right now. Then, you must determine how your coverage needs will change over time.

To determine the amount of term life insurance coverage you need right now, total your current and anticipated financial obligations. These might include your mortgage, child care and education, care for a non-working spouse or elderly parents, or anticipated uninsured or unreimbursed medical expenses. 

To determine how your coverage needs will change over time, calculate or estimate how much less your financial obligations will be in 10, 15, 20, 25, and 30 years. For example, if your parents are in their late 80’s, you will probably not need coverage for their needs in 20 years. If your child is entering college in two years, you will not need coverage for their education needs in 10 years. If you have only 20 years left on your mortgage, you do not need coverage for that after 20 years.

Everyone’s situation is different. You must decide for yourself what the appropriate amount of term life insurance coverage is at any given time. But bear in mind that once you purchase and ladder multiple policies, you can change your mind at any time if your life situation changes and you either need more coverage or require less coverage. All you need to do is purchase additional coverage or let a policy lapse. 

In any case, laddering multiple-term life insurance policies will protect those who rely on you while saving you money in life insurance premiums. Good luck!

About the Author

Veronica Baxter is a writer, blogger, and legal assistant living and working in the great city of Philadelphia. She frequently works with and writes for Boonswang Law, national life insurance attorneys based in Philadelphia who help beneficiaries when life insurance is not paying out.

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