Term Insurance Ladder Strategy

Your life insurance needs change over time. The term insurance ladder allows you to line up your life insurance coverage how you need it. Additionally, laddering insurance policies will help you save money. You can plan for peak coverage when you need it and less coverage as your needs dimish.

What Is Term Life Insurance Ladder Strategy?

The term life insurance ladder strategy is purchasing multiple life insurance policies with differing expiration dates. If you are familiar with the certificate of deposit (CD) ladder strategy, it is the same concept.

In the ladder, you have multiple smaller policies expiring at different years that align with future life events or financial obligations. For instance, you could buy

• A 20-year term policy to ensure all your current children would be cared for until they are college age
• A 30-year term to cover your mortgage
• A 10-year term policy to cover miscellaneous loans & debts

By buying 3 separate term policies, you are able to line up your coverage closer to your needs.

What are the Benefits of a Term Ladder Strategy?

There are 2 main benefits of a term ladder:

• Lower Cost to you – by avoiding periods of being over-insured, you optimize your costs
• Aligns your life insurance coverage to your life insurance needs

If you don’t ladder your term policies and just buy a single large policy you may be over-insured later in life.

Additionally, if you purchase a term product from one of the larger insurers, it likely comes with a term conversion rider. Therefore the ladder gives you the option to make each smaller policy a permanent policy as it comes near it expiration date.

Finally, as you age you have less future income to replace and a growing investment portfolio. So you need less death benefit coverage. If your spouse needs $1 million to cover all future living expenses, but you have a $5 million investment portfolio, you could opt out of having life insurance. Your assets are well above your needs.

How to Ladder Term Life Insurance

A term ladder is as simple as having multiple term policies with different expiration dates. That way as you get older and your life insurance needs decrease, your coverage decreases.

The policies can all be purchased together or have staggered purchases. The benefit of purchasing all your term policies at once, is you only have to go through underwriting one time. The benefits of staggered purchases is you can build up your coverage as you grow your needs. For example, you could buy a new 20-year term policy with the birth of each child. That way each policy lines up with getting a child to adulthood.

The illustration shows an example of a 25 year old setting up a term ladder. At 25, they get a 30-year term policy for $1million. This is to provide money for a spouse and pay off any outstanding mortgage.

Two years later at 27, they have a kid and decide to add coverage. To save on premiums, instead of getting a single $500,000 policy they get 2 separate policies for $250k each.

In this example, if the insured dies between 27 to 37, their beneficiary gets $1.5 million. If they die between 37 to 47, their beneficiary gets $1.25 million. And if they die between 47 to 55, their beneficiary gets $1.0 million.

After age 55, there would be no more life insurance coverage, unless they opted to extend the term coverage. In the illustration above, there are green stars indicating decision points. These policies may have term conversion riders or a post-level term option.

How Much Can A Term Ladder Save You?

Term insurance products have different prices dependent upon you and the coverage you choose. The price of term insurance will increase when:

• You are older
• You are less healthy
• You choose longer length terms
• You are male
• Credit score & criminal history
• Medical Records

In the exhibit to the right, you can see a 25-year old male pays $23 a month (~$275 a year) for a 10-year term policy. But they pay $43 a month (~$516 a year) for a 30-year policy. That is a little less than twice as much.

If you are 25 years old, needed $750k coverage now and want coverage till your 55, but over time your insurance needs decrease, you have to 2 options. You could:

1. Buy a 30 year policy for $750k. That meets your requirements of having $750k of coverage today and 30 years of coverage are met.
   • But as you get older and your coverage needs decrease, you would be over-insured. The cost of a 30-year $750k policy is around $150 a month or $1,800 a year.
2. Buy a term ladder with $250k of coverage in each of 10-year, 20-year, and 30-year term. That means from age 25-35 you have $750k of coverage, 35-45 you have $500k, and 45-55 you have $250k.
   • The cost of the ladder would be $96 a month ($23 + $30 +$43 = $96) or ~$1,150 a year for 10 years. Then $73 a month or $876 a year for the next 10 years. And finally $43 a month or $516 a year for the last 10 years.

The term ladder total cost over 30 years is $25,420 vs $54,000 over 30 years using the single policy option.

In this example, you pay less than 1/2 as much over 30 years using the term ladder vs a flat 30 year term product.

Should You Ladder Term Life Insurance?

Life insurance ladders are a way to spend the least amount of money while optimizing your life insurance coverage. When you are younger you likely have less savings and more future responsibilities. Therefore, your insurance needs are likely higher.

Over time your insurance needs decrease as debt gets paid down, children grow up, and your wealth increases.

A properly designed life insurance ladder maximizes early coverage and offers many future points to naturally adjust your coverage to match your needs.

However, everyone’s individual circumstances are unique. You may decide on permanent insurance or a single large policy is the right choice for you.

Alternatives To the Term Life Insurance Ladder

There are many types of life insurance available to you. You can design coverage that best fits your needs. Some alternatives to a term insurance ladder that may work for you are:

• Term & Permanent Life Insurance Ladder – This is similar to the term ladder, but with the addition of a permanent life insurance policy. When you are young, you can purchase a small permanent product. This may be for the purpose of covering funeral expenses. Or, many permanent insurance products offer the option of growth in death benefit over time. This adds another even longer term option to the life insurance ladder.
• Universal Life Permanent Insurance – There are many types of Universal Life insurance (UL). The main similarity is allowing flexible premium payments. As long as you keep your account value positive, the policy remains active. UL policies allow you to pay more some years and the flexibility to then pay less in other years. Note, permanent insurance typically costs 5-15x a similar term policy. However, flexible premium UL is beneficial if you want permanent coverage and have variable income or will make significantly more later in your career.
• Decreasing Term or “Paycheck” Term – The insurance industry is starting to explore various types of decreasing term insurance. These products pay out less death benefit as each year passes. If you think of life insurance as replacing your salary if you die, every year that passes is 1 less year of paycheck that needs replacing. These products function like a 40-year term ladder with a small term product maturing every year.

The Final Word – Term Life Insurance Ladder

Term life insurance ladders are a great option to optimize your insurance coverage while keeping the cost low. When you buy term policies of differing lengths that mature at life milestones, you can ensure your loved ones are cared for without being over-insured.

A term ladder can save you 50% or more over the lifetime as opposed to purchasing one large, long-term policy.

There is no limit to the amount of policies you own and you can make your ladder as granular as you want. However, term insurance does have a maximum age (90-95 usually). But if you want truly lifetime coverage, you will need permanent insurance which will cover you till you die. Permanent insurance does cost 5-15x as much as a similar term though.

Life insurance choices are unique to your circumstances. Review you financial plan and needs and see if a term life insurance ladder works for you.