Life insurance can help provide:
- Income replacement for surviving partner or spouse
- Funds to support raising dependents, including education
- Debt repayments
- Money for final expenses (medical bills, a funeral)
You can buy one life insurance policy to cover all of your family’s financial needs. Another option is to buy separate life insurance policies to cover different needs. This second option is called laddering life insurance.
Life insurance needs naturally decrease over time as household income increases and mortgage loans decrease. Laddering life insurance can help you save money over the long run.
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Buying One Life Insurance Policy versus Laddering Life Insurance Policies
To see how you can save money by laddering life insurance policies, let’s take a look at an example.
Todd is 35 years old. He’s married and has two children ages 3 and 1. His annual income is $60,000. They recently moved into a new home and have a 30-year mortgage loan with a $250,000 balance.
He has three goals for his life insurance:
- Replace his income so his spouse can keep paying everyday living expenses
- Provide funds for his children’s college education
- Pay mortgage payments
Todd is still about 30 years away from retirement. He wants $1,000,000 worth of life insurance coverage for income replacement alone.
To send his two children to college for four years, he estimates about $75,000 each for tuition and room and board for the local university. He wants $150,000 worth of coverage dedicated to his children’s education.
He wants to also make sure if he died tomorrow that his family would not need to uproot their life and be forced to move elsewhere. He wants $250,000 worth of coverage dedicated to enabling his family to pay the mortgage.
He remembers his family needs to pay for a funeral if he dies so he adds $20,000 to his calculation.
To cover these goals, Todd’s life insurance needs total $1,420,000.
Buying One Policy to Cover Life Insurance Needs
His longest obligation is the mortgage which is a 30-year term. This means he wants his term life insurance to also last 30 years.
If he bought one $1,420,000 30-year term life insurance policy, he will pay $89 per month (at the best possible rate class).
If he dies unexpectedly at any time in the next 30 years, his family receives a death benefit check of $1,420,000. If he lives through the entire 30-year term, he’ll have paid $32,040 in cumulative premium payments.
Laddering Life Insurance Policies to Cover Life Insurance Needs
Todd decides that in order to save money on the monthly life insurance premiums, he wants to ladder life insurance policies to cover the different needs.
He knows he’ll need less life insurance later on in life due to anticipated savings, his children being financially independent, and a decreased mortgage balance.
He needs the most life insurance coverage while his children are young.
He decides on the following three policies:
- Policy #1: 30-year $275,000 term life insurance policy
- Monthly premiums = $23
- Lasts until Todd is 65 years old
- Policy #2: 20-year $750,000 term life insurance policy
- Monthly premiums = $29
- Lasts until Todd is 55 years old
- Policy #3: 10-year $500,000 term life insurance policy
- Monthly premiums = $15
- Lasts until Todd is 45 years old
By laddering his policies, he has the most coverage while his children are growing and has many financial obligations. As his children grow up and he gets closer to retirement, the policies begin to lapse which lowers his total coverage as well as his total monthly premiums. Below shows how much coverage he has by age and the total monthly expense for coverage.
|Todd’s Age||Total Life Insurance Coverage||Total Monthly Premium Payments|
|35-45 years old||$1,525,000 (3 policies active)||$67|
|45-55 years old||$1,025,000 (2 policies active)||$52|
|55-65 years old||$275,000 (1 policy active)||$23|
As you can see, he pays the most in overall premium payments the first 10 years while all three policies are active. But even this $67 total monthly payment is lower than what he would have paid each month if Todd bought one 30-year $1,420,000 term life insurance policy.
And let’s not forget Todd’s spouse needs life insurance coverage as well! You never know what life may bring. An unexpected death can befall anyone.
The above example explains only Todd’s life insurance needs. His spouse’s coverage needs will be similar. The only difference may be in regards to income placement if the spouse makes significantly more or less money than Todd.
Laddering Life Insurance Can Help You Save on Premiums
Laddering term life insurance coverage is a powerful way to reduce costs and ensure you get the most value out of your premium dollars.
You can start the process by running term life insurance quotes. Through Quotacy, you can see estimated costs without even giving away any contact information.
You can purchase one policy or more than one. If you’re unsure the best strategy for your family, contact us. Our advisors can help you determine how much life insurance you need and how to ladder policies if you’re interested.
Note: Life insurance quotes used in this article accurate as of April 8, 2021. These are only estimates and your life insurance costs may be higher or lower.
About the writer
Natasha Cornelius, CLU
Senior Editor and Licensed Life Insurance Expert
Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.