How to Save on Life Insurance With the Ladder Strategy
A person’s need for life insurance coverage changes as they grow older. Initially, a person may need little to no coverage.
As people grow older, they may get married, have kids, take out debt and more. Then, as you get even older, your kids may move out and your debts may get paid off.
You likely are building assets to work toward retirement, too. At some point, you may need less life insurance or no life insurance at all.
That's why you might consider the life insurance ladder strategy.
Here’s what you need to know about it and how it works to see if it is a good fit for your situation.
What is the Life Insurance Ladder Strategy?
The ladder strategy is a concept that applies to several products. You can use it with bonds, certificates of deposit (CDs), term life insurance, and more.
With this strategy, you purchase several term life insurance policies at one time. Each policy has a different term, or period of time, which it is in effect for.
Each policy may have a different death benefit amount or the same death benefit amount based on your needs.
The term ladder is used because viewing the policy’s lengths on a time chart looks somewhat like a ladder you can climb down.
For instance, you may have a 30-year term, 20-year term and 10-year term life insurance policies.
The idea is:
You’ll need less life insurance coverage later in life. By structuring your life insurance with a ladder strategy, you may be able to save money.
In the beginning, you have the most coverage because all three policies are in effect.
As each policy expires, your coverage amount decreases.
How You Can Save Money Using the Ladder Strategy
For term life insurance, the ladder strategy may help you save money on your life insurance costs. It does this in a few ways.
Only get the coverage you need
With a ladder, you can buy the full coverage amount only for the time you need it.
You do this by purchasing many policies with different term lengths based on your projected needs. Since your needs should decrease over time, your coverage will, too.
You’re only paying for the coverage you need when you need it.
You don’t have to pay for the total coverage you need for the full 30 years. This saves you money as you’ll see in the example below.
Take advantage of pricing differences
Term life insurance policies have different price points depending on how long the policy is in effect.
A 30-year term life insurance policy will cost more than one that is only in effect for 20 years.
Without the ladder strategy, you’d usually only buy a single life insurance policy.
If you need coverage for 30 years, you buy the full amount of coverage you need at any point over those 30 years in a single policy.
A ladder strategy means you buy several policies with different terms. These different terms allow you to take advantage of shorter-term policies’ cheaper rates.
Secure coverage when it is cheap
A ladder strategy can help you save even more money by buying all of the coverage you anticipate needing upfront.
The reality is:
Life insurance is cheaper when you’re younger and healthier due to the lower chances of you dying.
By purchasing a ladder that will cover your financial future early in life, you can take advantage of your young age to secure cheap rates.
If you don’t use a ladder strategy early in life, you may have to add more coverage later.
Expect to pay more for those policies as you age and new health conditions pop up.
Example of a Life Insurance Ladder
The life insurance ladder strategy is easier to understand when you see it in action. Here’s an example of how it works.
Josh and Melissa are 25-year-old newlyweds. They decided to get serious about their finances and purchase life insurance early in life.
First, they took a look at their current and potential future financial obligations.
Josh has $50,000 of student loan debt that will be paid off in 10 years. They each have a $25,000 car loan that will be paid off in five years.
They want to buy a $300,000 home together in five years but plan to use a 15-year mortgage to save money on interest costs.
They also take a look at their family and long-term financial goals.
Josh and Melissa plan to have two kids, one at age 30 and another at age 32. They want to pay for their kids’ college costs in full so they don’t have to worry about student loan debt.
Josh and Melissa plan to retire at the traditional retirement age of 67.
Together, they decided they need a million in coverage each for their situation due to the current assets they hold.
Their life insurance ladder strategy
They decide to use a ladder strategy and break up the million-dollar amount of life insurance coverage into the following term life policy amounts.
- $600,000 30-year term life insurance policy
- $300,000 20-year term life insurance policy
- $100,000 10-year term life insurance policy
The initial 10-year term life insurance policy is designed to cover Josh’s student loan debt and their car loans.
The 20-year term life insurance policy should cover any mortgage balance remaining on the couple’s 15-year mortgage should either one pass away early.
They figure the 30-year term life insurance policy should help cover potential college costs and other financial needs during the last 10 years of their 30-year plan.
How the strategy saves money
Here’s how this could save Josh and Melissa money. The below prices aren’t actual quotes, but are used for illustrative purposes only.
If each Josh and Melissa buy a 30-year term life insurance policy for $1,000,000, it would cost them $1,000 each per year. This is $2,000 in total per year.
Instead, they each purchase the three policies at the following annual costs:
- $600,000 30-year term life insurance policy - $600 each per year or $1,200 in total per year
- $300,000 20-year term life insurance policy - $250 each per year or $500 in total per year
- $100,000 10-year term life insurance policy - $60 each per year or $120 in total per year
The ladder strategy only costs them $910 each per year or $1,820 in total per year for the first 10 years. The real savings kick in as shorter policies drop off.
After 10 years, the couple will only pay $850 each per year or $1,700 in total per year.
After 20 years, this drops down to $600 each per year or $1,200 in total per year.
Overall, the ladder strategy would save the couple $12,800 in total versus buying a single 30-year term life insurance policy for each of them.
Who the Life Insurance Ladder Strategy May Be a Good Fit For
The ladder life insurance strategy may be a good fit if you’re good at managing your money.
You need to be a planner that thinks ahead about the potential financial obligations you’ll have.
Because you’ll have multiple policies, you’ll need to make sure you have a system in place to make payments on time.
You don’t want a policy lapsing because you forgot to pay it.
You also need to have a solid financial plan that’s relatively predictable. If anything pops up outside of your financial plan, you may not have purchased enough life insurance in your initial ladder.
You may be able to buy more coverage later.
That said, it will likely be more expensive.
If you develop certain medical conditions, you may not be able to purchase term life insurance at all. Other financial products may be available instead, but they generally cost more.
Who May Not Be a Good Fit for This Strategy
The life insurance ladder strategy isn’t a good fit for everyone.
While it can save you money, it’s a lot to plan for and keep track of. Those that are unsure of what their future holds may be better of with a single large policy.
If the savings aren’t worth it to you, you may be better off paying a bit more for a longer-term policy for the full amount. This can provide an additional death benefit and more peace of mind, too.
The life insurance ladder strategy could save you money versus purchasing a single term life insurance policy.
You have to be a diligent planner and have systems in place to make sure you make all of your premium payments.
For many, the savings are worth the additional hassle of setting up a life insurance ladder.
If they aren’t worth the savings for you, you can always buy a single term life insurance policy.