Life insurance laddering is basically when you stack multiple life insurance policies on top of each other. The goal is to have lower overall premiums, so you’re neither underinsured or overinsured throughout various stages in life.
You see, when you’re young and single, your insurance needs are completely different from when you’re older, married, and building wealth.
So instead of getting a mammoth policy to protect you for 30 years, it might make more sense so sign up for multiple smaller policies with staggered term lengths.
In this post we’ll cover what life insurance laddering is, some examples, and how you might be able to implement it in your own financial life.
Life Insurance 101
First, let’s quickly review the basics of life insurance…
The purpose: Life insurance protects your loved ones from taking on a complete financial mess if you were to die unexpectedly. If your family depends on your income to survive, you need life insurance.
The best type: By far, the most cost-effective and best coverage type is “Term” Life Insurance. Almost all other insurance+investment products are money wasters. (We’ll go into further detail in the Q&A at the end)
Term length: When you purchase a term policy, it’s typically in place for 10, 20, or 30 years.
The Payout: During the policy term, if you were to die unexpectedly, the insurance company would pay out a large chunk of money to your loved ones. This is called the “death benefit.”
Who gets paid? The death benefit is paid out to the “beneficiary”. This can be anyone you choose to receive the money, like your siblings, kids, spouse, or whoever you want to appoint.
This payout can be used to help cover funeral expenses, pay off your debts, pay for bills and everyday expenses, future education, or even just ongoing living costs. The beneficiary decides how the money is spent (that’s why it’s so important to pick someone you trust 💯!)
What is life insurance laddering?
At its core, life insurance laddering is simply purchasing multiple term life insurance policies with different coverage periods and expiration dates.
Why do this? Because purchasing just a single, large insurance policy might be overkill. By stacking a few smaller policies on top of each other and staggering the expiration dates, you can tailor-make coverage that matches your financial trajectory more acutely.
Life insurance laddering can mean paying a little less for premiums over time. And it also makes sure you have the most coverage during the most crucial times in your journey.
Here are two examples in which life insurance laddering could make sense…
Laddering Example #1:
Tim is 25, has no kids, and a wife who is currently in grad school. He purchased a $1M term life insurance policy for 30 years.
A few years later, he and his wife have a few kids and a large mortgage! Tim quickly realizes he needed more coverage so his wife and kids could be financially stable if he suddenly passed away.
So, he purchased an additional 20-year, $1M term life insurance policy.
By “stacking” these policies on top of each other, Tim effectively doubled his coverage from $1M to $2M for the crucial years while his kids were young and his family was most financially vulnerable.
By “laddering” the expiration terms and expiration dates, Tim isn’t overpaying for coverage in the later years when the kids have moved out and their family is more financially stable.
Laddering Example #2:
The Smith family calculated how much they needed to be financially independent and are planning to build a $2M nest egg.
They want life insurance coverage to match their goal, but realize that as time goes on and they save more, they will need less coverage. So, they purchase 3 separate life insurance plans:
- Policy #1: $500,000 of coverage with a 30-year term.
- Policy #2: $500,000 of coverage with a 20-year term.
- Policy #3: $1,000,000 of coverage with a 10-year term.
By laddering their insurance coverage, the Smith family will have $2M of coverage during the first 10 years. This is when they anticipate having the biggest financial responsibilities and lowest net worth.
But after those first 10 years, they believe they’ll have a hefty nest egg saved. Thus, they’ll need less coverage.
Lastly, as they are getting closer to retirement and have a much bigger basket of assets, they feel more comfortable having less insurance coverage. Since they are getting closer to financial independence, the need for insurance diminishes.
Laddering Example 3:
At age 30, John bought a cheap life insurance policy. He only selected $500k in coverage because at the time he and his wife didn’t have many financial responsibilities.
15 years later, when John was 45, he woke up and realized he was waaaay underinsured. Not only was his $500k policy nowhere near enough coverage, he also was far behind in retirement savings!
To fully protect his family, John bought a new $2M policy for a 15-year term. He calculated that by age 60, he wouldn’t need any life insurance coverage at all anymore.
Out of the three examples, this last one is probably the most common. Most people are late to the game when it comes to buying a term life insurance policy and find themselves grossly underinsured.
Life insurance laddering can be a proactive choice, purchasing multiple policies up-front at the same time. That can be a solid approach for younger folks. But it’s also hard to correctly predict your future needs!
For many other folks, laddering your life insurance policies reactively as your finances change can be the most efficient choice, helping you fill coverage gaps as needed with more up-to-date information.
The big downside to buying new policies later in life is the cost. It’s more expensive to insure older people. The other potential downside is that you might not be able to get coverage at all if you encounter major health issues.
Why not just get one big term policy?
Seems like a lot of math to me… why not just get one comprehensive term life policy?
Well, generally speaking, while buying one 30-year term policy will give you more coverage throughout the full duration of your term, it’s usually much more expensive than using a laddering strategy.
Here’s an example of what potential savings could look like.
Let’s say you’re a 30-year-old male in good health. We’ll compare three separate $500,000 term life insurance plans, with 10, 20 and 30-year terms.
The cost breakdown might look like this:
- 10 year policy: $13/month
- 20 year policy: $19/month
- 30 year policy: $30/month
If you add up all the premiums, the total cost would be $16,920 for the entire 30 years of coverage.
However, if you purchased a single $1.5M life insurance plan for a 30-year term, it could cost you approximately $80 per month. This would end up costing you $28,800 in total premiums.
Using a life insurance laddering strategy would save you $11,880 in premiums. It’s like taking a scalpel to your life insurance needs instead of using a hatchet.
Investing the savings
Paying less in overall insurance premiums is a win. There are other more important things you can do with the money you save on insurance, after all.
So let’s take it one step further and see what happens when you invest those savings…
For the first 10 years, you’ll be saving $18 each month. For the next 10 you’ll save $31, and over the final stretch, there’s a $50 difference in premiums.
All in all, if you invest those tiny monthly amounts (in something like a broad stock market index fund) you’re looking at accruing a total potential extra $36,173.28!
That’s enough to take the whole family on a month-long vacation later in life. Or you could finally buy that boat you’ve been wanting in retirement. Or renovate your kitchen for your new cooking hobby later in life.
As you can see, right-sizing your life insurance needs using a laddering strategy can be a great financial tool to give you the coverage you need without overdoing it.
What if you predict coverage incorrectly?
Hey, we get it- life happens.
Maybe you wake up one day in a bind and realize you need more coverage. Or, maybe the opposite – you’ve ramped up your investing and you’re closer to financial independence than you thought.
Whatever the case, there’s no need to freak out. Life insurance laddering is a flexible strategy.
First off, some policies allow you to change the coverage amount mid-term. It will change your premiums to match, but it’s nice to know you might be able to change the existing policy.
If you need less coverage, you can always cancel one of your policies at any time. Simply stop paying the premiums and the policy will become inactive.
You can also purchase a new policy at any time. Usually, when you discover a new need for additional coverage, it’s for a short period of time. So you can pick up a new 10-year term by shopping on the open market. No worries!
Getting a new policy lets you hang onto the lower rates you already locked in years ago, and only supplement it by paying for the tiny bit extra you need.
How to implement life insurance laddering:
Figuring out a life insurance laddering strategy that suits you is easier than you might think! Here’s what you need to do:
Step 1: Assess your existing coverage
Do you already have a life insurance policy?
It’s quite common for folks to buy a 15, 20 or 30-year policy early in life, then realize later that they don’t have adequate coverage.
This is actually the perfect scenario for life insurance laddering! Instead of scrapping that old policy and getting a new bigger one, you only need to work out the “gap” in coverage that you’re trying to cover going forward.
Also, check your employer benefits! Many companies offer employees a term insurance policy that covers all their employees. So if you pass away while employed there, your beneficiaries would be eligible for a payout.
But, the coverage in your workplace benefits is typically pretty low. If you’re lucky it’s equivalent to about one year of your salary. It’s nice to have, but definitely not enough to protect you fully.
In any case, add up all your existing policies and use that coverage as a baseline to start the laddering strategy.
Step 2: Figure out how much coverage you need right now
We’ve written extensively about this in our post, how to buy life insurance.
Figuring out how much coverage you will need is pretty simple.
Coverage Amount = Retirement Number – Current Net Worth
It doesn’t have to be exact. Just rounding to the nearest $100k is good enough to start.
For example: Let’s say you have a current net worth of $200,000. And your overall retirement goal is $2 million.
This means the maximum coverage you’ll need starting out will be about $1.8M.
Step 3: Estimate future coverage needs
The next step for laddering your life insurance is to estimate how much your net worth will grow over time.
This will determine how much less coverage you’ll need in the future.
(Remember, it’s nearly impossible to have exact predictions. So just do the best you can to estimate with round numbers based on your current savings rate.)
For example:
Let’s say your retirement goal is $2M, and you currently have a net worth of $200k. To begin, you’d need coverage of $1.8M combined across multiple policies.
In about 15 years, however, you anticipate crossing $1M in net worth (go you!). This would lower your coverage need to just $1M.
Then a short 5 years after that, you plan to cross $1.5M in assets, lowering your coverage need even further.
Here is what life insurance laddering might look like with 3 separate policies:
- $500,000 of coverage with a 25-year term
- $500,000 of coverage with a 20-year term.
- $800,000 of coverage with a 15-year term.
So for the first 15 years, you’re covered for $1.8 million. Then the next 5 years, $1M, then the final 5 years just $500k.
As your net worth grows higher 👆, the need for insurance decreases in proportion 👇.
Step 4: Shop around for the best rates
Next, it’s time to start shopping around to ensure you get the best rates possible on your policies.
Luckily, it’s never been easier to compare insurance rates from different companies.
Most companies will offer your quotes online, or, you can use a website like PolicyGenius to compare multiple quotes with various providers all in one place.
While classic life insurance companies like Aflac and Progressive will allow you to get quotes online, Costco members can also qualify for policy discounts by shopping online too. Just answer a few questions about your age and health, the amount of coverage you need, and the type of plan you’re looking for, and it’ll list out a bunch of policy options to choose from.
Remember when you’re shopping for insurance, it’s important to thoroughly vet the insurance company before doing business with them.
Why? Because if you die, you want to be sure that the company is in a financial position to pay out that death benefit!
Pay careful attention to customer ratings, reviews, and financial rating. The financial rating can help you to determine whether or not the insurer is financially sound. You can check this on websites like AM Best, Moodys, or Standard & Poors.
Step 5: Apply for multiple term policies
Once you’ve decided which insurer you’re going to be using, it’s time to actually apply for those policies.
Each company follows a slightly different process for getting your policy up and running, so follow their directions. They will likely ask you questions about your current health, your habits, and your family history.
You may also need to complete a health examination during the process.
If this is the case, the examiner will come to your home and perform a simple exam lasting between 15-45 minutes. However, not all insurers require this.
Step 6: Review and purchase the plans
Once you’ve been approved and presented with the final costs, it’s time to review and purchase your life insurance plans. Make sure to read everything, even the boring stuff!
And don’t hesitate to reach out to your insurer if you have any questions. Be thorough – it’s important.
If everything looks good to you, go ahead and follow their instructions to purchase and finalize your life insurance policy.
Step 7: Name a beneficiary
Remember, this is the person who will receive the death benefit if you die during the term. And they have full discretion on how the money is spent!
So make sure to pick someone financially responsible. In most cases, picking your spouse will be a good move.
You can also name multiple beneficiaries, in which case you just need to specify what amount of the death benefit goes to each person.
It’s also easy to make beneficiary changes over time. Some insurance companies let you change it online quickly.
Step 8: Check in regularly
Last but not least, make sure you stay on track by checking in every now and then. It’s important to make adjustments if you need to correct your coverage along the way.
Life insurance laddering is mostly a set-and-forget-it procedure. But still we advise you to keep tabs on whether those policies still match your financial needs throughout your journey.
Why have life insurance anyway?
When I was younger, I used to think that life insurance existed to basically give your family a sweet kickback to ease the sorrow. “If I’m gonna die, at least my family can get rich!” 🤑
Oh, how naive I was… The point of life insurance is not about numbing the pain with a big wad of cash (because money can’t fix sadness).
Instead, all that payout money is meant to replace your income when you die and prevent your family from having a financial crisis.
Those who depended on that income can continue to get by without your income. Personally, I think we should all agree to change the name to “income insurance!”
Who needs life insurance?
Not everyone actually needs life insurance.
The only folks who need life insurance are those who have dependents who rely on their income to survive. So, if you’re single and living on your own without any dependents, you don’t really need to purchase a life insurance policy.
But what if you are planning to have kids later down the line? Shouldn’t they get an insurance policy now while they’re younger to lock in cheaper rates?
Nope! You’ll be better off investing the money you would be paying on policy premiums and putting it inside tax-advantaged retirement accounts. There’s no sense in paying for life insurance you don’t need, no matter how cheap it is. Life insurance for minors is often a poor use of your money.
However, there is one exception to this rule. And it is… *duh da da daaah,* stay at home spouses! Non-working spouses provide unpaid labor running the household and they also need to have life insurance.
Why? Because this unpaid labor saves the family tens of thousands of dollars each year that would likely need to be outsourced in the event of their untimely death.
Related: Do my kids need life insurance?
What kind of life insurance should you get?
There are multiple different kinds of life insurance products out there, including term life, whole life, universal life, and variable life insurance. However, for almost all folks, getting term life insurance is going to be the move.
Term life insurance is the simplest and most affordable form of life insurance. You purchase coverage for a set amount of time, or “term,” and when it expires, you are no longer covered.
However, the death benefit will be worth the same amount for the duration of your coverage. Meaning your beneficiary will be paid the same amount should you die on the first or last day of your policy.
While you may think that your life insurance policy expiring 10, 20 or even 30 years down the line is a downside, it’s actually not. The more wealth you grow over time, the greater ability you will have to self-insure, which is ultimately the goal.
If you die with a massive nest egg, your family will be able to make do with their inheritance, and hence you would have no need for an insurance policy.
By the way, if you want to understand why term life insurance is going to be the right call for most folks, be sure to check out our life insurance megapost where we break down all the different types of life insurance and how they work.
How much life insurance do you need?
Getting the wrong amount of coverage can hurt you financially. Getting too small of a policy means your family could be left struggling if you die, but getting too much coverage means wasting money. You want to hit that sweet spot!
Luckily, figuring out how much life insurance coverage you need is actually pretty easy! Just subtract your current net worth from your “FI number,” a.k.a., the amount of money your family will need to be financially independent.
For example, if your net worth is $200,000 and your FI number is $2,000,000, you would need $1,800,000 in life insurance coverage to begin with.
But remember, as you build wealth and your net worth increases, the amount of life insurance coverage you need shrinks. This is why life insurance laddering is such a great strategy. It lets you tailor-make your overall coverage amount throughout different phases of life.
Should you use life insurance laddering?
This really is a personal decision because insurance isn’t just a numbers game. It’s a peace of mind tool that eases financial stress.
Some people are happy to pay for excessive coverage because it helps them sleep better at night. Others might want a single policy for simplicity and don’t mind paying more.
But if you’re a personal finance nerd who is very in tune with your financial projections, life insurance laddering can be a savvy strategy. It can lower the overall cost of premiums, give you flexibility throughout life, and keep you covered with the highest amount in critical years.
The Bottom Line:
Life insurance laddering means stacking multiple policies on top of each other to provide dynamic coverage over time. By staggering the term lengths and expiration dates, you can better match the coverage amount for different stages of life according to your financial responsibilities.
While a laddering strategy does take a little extra planning, the money you’ll save on life insurance premiums can equate to having tens of thousands of dollars more in your investment accounts down the road. Don’t sleep on this underutilized strategy!
It’s not a fit for everyone. But it’s worth running the math to see if you can better protect yourself with a crucial insurance product for a cheaper overall cost!
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