When you become someone’s partner or a parent (or have others that depend on you), your priorities often shift. Maybe your biggest concern before having loved ones in your life was, “Should I have a burrito for dinner for the third night in a row?”
Now you’re realizing that you want nothing more than to keep your loved ones safe and secure for the rest of their lives. (And maybe still the occasional dinnertime burrito.) That’s where life insurance comes in. (This part is about your loved ones, not burritos.)
There’s no one-size-fits-all life insurance. There are different types of life insurance – you can find the policy that fits best for your budget, needs, and future plans. What they all have in common, though, is that you can pay a premium to ensure that if you were to pass away while you have an active life insurance policy, your beneficiary would receive a payout (called a death benefit) that could give them some financial protection. This benefit could help with funeral expenses or even go towards debts, the mortgage, or college tuition.
Laddering life insurance means that you purchase multiple life insurance policies (most often term life insurance) with staggered term and death benefit amounts. Rather than purchasing a single life insurance policy with the full coverage amount for your needs, you purchase multiple policies that add up to the complete amount.
Laddering life insurance policies may seem complicated, but the strategy can be surprisingly easy to implement and offer timely benefits for younger families.
Why is insurance laddering important to consider?
First, you need to determine how much life insurance coverage you will need. When coming to that coverage number, many people take into consideration their current and future financial expenses that, if they were to pass away, these expenses could cause a financial burden to the family members that depend on them.
Using the laddering strategy in insurance is important to consider as an option that could help families spread out the cost of insurance needed for their particular situation.
- Mortgage: Some people will include their mortgage amount in the equation so that the death benefit could help pay off the family home.
- Debt: Student loan debt, auto loans, credit cards… it all adds up.
- Childcare: Whether you are a stay-at-home parent or work full time, your loss could mean that more hands are needed for the care of your children, whether a nanny, after-school programs, or babysitters.
- Tuition: If you have children enrolled in private school or have hopes to send your children to college one day, those tuition expenses can add up.
- Income replacement: Whether or not you’re the financial “head of household,” your financial contributions matter to the family.
- Final and future expenses: As if losing a loved one isn’t hard enough, final medical bills and funeral expenses can be more than a standard family budget is prepared for. Funeral expenses can average in the thousands of dollars.
Laddering life insurance policies is a strategy to help with the most financial coverage (if you were to pass away) earlier in life when it would be most needed. When looking at the most common big expenses outlined above, many of those (student loan debt, childcare, tuition, mortgage payoff, etc.) are weighted heavier in early adulthood/middle age than later in life, when student loans and mortgages may be paid off, children are out of the home and done with school, and overall life expenses are reduced.
How to ladder life insurance
Let’s say you’re in your 30s, you have a mortgage, some debt, and a few kids. You’ve determined that $1.5 million would be the best coverage amount to help pay off your home and debts, provide some income replacement, and ensure that your children can go to college without taking out loans.
If approved…You could get a 30-year policy for $1.5 million and be covered. One policy, one premium. Pretty straightforward. Or, you could get:
- a 30-year policy for $500,000
- a 20-year policy for $500,000
- a 10-year policy for $500,000
With the ladder life insurance strategy outlined above:
- If you were to pass away before the first 10 years… your beneficiary would receive the full $1.5 million. You would likely have a large mortgage with less equity, more debt, and childcare/upcoming tuition expenses.
- If you were to pass away in years 11-20…your beneficiary would receive $1 million. At this point, your family may have reduced expenses – children out of the home and maybe completing college, less mortgage and other debt. Payments would now be only for two policies, rather than the three you started with.
- If you were to pass away in years 21-30…your dependents would receive $500,000. At this stage in the ladder life insurance strategy, you would only be paying for one policy, which could be helpful for people preparing for retirement and trying to reduce expenses and budget.
The strategy of laddering life insurance policies accounts for several factors:
- Decreasing life expenses: Younger families generally have larger expenses than people in their later retirement years: larger mortgages, student loans and other debt, and tuition costs for children. Laddering life insurance is designed to help families taper off coverage as their financial needs decrease with time.
- Increased term life premiums: Life insurance policies are almost always lower, the younger and healthier you are. A healthy person in their 30s will likely get better rates than a healthy person in their 50s. Getting a 30-year policy at 35 could have lower premiums than getting a 20-year policy at 45.
Is laddering life insurance policies right for you?
To determine whether you could benefit from the life insurance ladder strategy, it’s important to check off a few steps:
- If you haven’t yet, figure out how much coverage would be best for your needs.
- Get a quote for the amount of coverage you’d need (it’s quick and free).
- Get several quotes at different term lengths for the ladder life insurance strategy that might work for you (still quick, still free).
- Compare which strategy might work best within your budget and financial responsibilities. (One premium payment for one larger coverage amount over a longer period vs. multiple premium payments for smaller amounts over differing periods.)
Even if you’re not ready to tackle laddering at this stage, Bestow wants to make it simple to help you get started with a first term life insurance policy:
- Apply online in minutes
- No medical exam
- Rates as low as $11/month
- Terms from 10-30 years (in 5-year increments)
- Choose up to $1.5 million in coverage
- Level premiums (rates locked in with your policy)
- Eligible ages: 18 to 60
Have more life insurance questions? Explore our Learning Center.