Laddering Life Insurance: A Strategic Approach

If you’re in the market for life insurance, you might feel overwhelmed by the many choices available. A common path is to buy a single term life policy that provides a fixed amount of coverage for a set number of years. However, there’s an alternative strategy that could be both more strategic and flexible: laddering life insurance policies. This involves combining multiple term policies, or a mix of term and permanent life insurance policies, to match your coverage to your financial needs over time.

In this article, you’ll learn how laddering life insurance policies work, why it can be a more flexible strategy over the long-term and the added benefits that permanent insurance can offer when integrated into your coverage plan.

What is laddering life insurance policies?

Laddering involves buying multiple policies with different coverage periods and/or types of life insurance, typically based on your expected financial obligations at various stages of life. For instance, you might buy one term policy to cover your mortgage for 20 years and another term policy to cover your children’s education for 10 years. As your financial obligations decrease (mortgage is paid off, children graduate), so does the need for certain levels of life insurance coverage.

Read our blog to learn about the differences between permanent and term life insurance.

Laddering life insurance is a flexible option

Only pay for the coverage you need

With a single large term life policy, you often end up paying for more coverage than you need at various stages in life. For example, buying a 30-year term policy for $1 million might provide enough coverage for your children’s college years and your spouse’s financial security after your passing, but what happens after those primary needs are met? You might still be paying the same premium for the $1 million coverage even when your children are financially independent, or your mortgage is paid off.

Laddering policies ensures you’re not paying for coverage you no longer need. With a more tailored approach, you only pay for coverage during the periods when you have the most financial responsibility. You could have one policy end when your mortgage is paid, another end when your children finish college, and a smaller, longer-term policy that provides for your spouse or estate needs.

Avoid paying high premiums at older ages

One of the most significant advantages of laddering policies is that it helps you avoid the high premiums associated with life insurance as you age. By structuring term policies so they gradually expire when they’re no longer necessary, you prevent being locked into costly annual renewable term rates, which can become prohibitively expensive in your 50s and 60s.

Instead of being faced with renewing one large policy at a higher rate as you age, laddering allows you to drop coverage as your needs diminish, keeping costs lower over the long term.

Case study: laddering policies

Here’s a hypothetical example to understand the benefits of laddering policies.

Tara, a 33-year-old mother of two, works with her financial professional to determine that she needs $750,000 in life insurance coverage. Her financial obligations are as follows:

• $250,000 for mortgage protection – with 20 years remaining on her mortgage.
• $250,000 to cover her children’s college expenses – a 15-year need.
• $250,000 for final expenses and legacy planning – a long-term need.

Tara has two main options for securing life insurance:

Option one: Buying a single 30-year term policy for $750,000.

• Annual premium: $223
• Total cost over 30 years: $6,690

Option two: Laddering policies based on specific needs.

· $250,000 15-year term (for children’s college expenses)

• Annual premium: $155
• Total cost: $2,325

· $250,000 20-year term (for mortgage protection)

• Annual premium: $168
• Total cost: $3,360

· $250,000 permanent policy (for legacy/final expenses)

• Annual premium: $878
• Total cost: $26,327 over 30 years

· Total cost for laddering policies: $32,012

When we delve deeper into the benefits, laddering can provide advantages over the long-term.

The benefits of laddering life insurance

1. Flexibility and lifetime coverage: A permanent policy also provides lifelong coverage. If Tara outlives her term policies, the permanent policy continues to provide coverage for her legacy and final expense needs. Had Tara bought only the single 30-year term policy, she would have faced a decision at age 63: either convert part of the term policy into permanent coverage or let it lapse.

• If she were to convert $250,000 into a permanent policy at age 63, the annual premium would jump to $3,551, potentially making continued coverage cost prohibitive.
• If she chose not to convert, she would lose the coverage entirely, along with the $6,690 spent on premiums with no financial recovery.

2. Pay for only what you need: Tara’s financial needs vary over time. By laddering her policies, she’s paying for coverage aligned with specific obligations. The 15-year term covers her children’s education, while the 20-year term aligns with her mortgage timeline. After these needs expire, she’s left with only the permanent policy to cover long-term expenses, avoiding overpaying for unneeded coverage.

3. Access to living benefits: Many permanent life insurance policies include options such as a living benefits rider, which allows access to part of the death benefit if you’re diagnosed with a serious medical condition. This can be a valuable resource to help protect savings and cover medical expenses in later years. A permanent policy may offer Tara:

• $187,500 for terminal illness.
• $125,000 for chronic illness.
• $62,500 for critical illness.

Check out our blog about How to Pay for a Serious Illness in Retirement to learn more about the living benefits Ameritas offers.

4. Cash value accumulation: The permanent policy’s cash value also plays a critical role in the overall strategy. A permanent policy can build cash value over time, which can be used as an additional source of funds in retirement or an emergency if needed.1 By the time Tara reaches age 63, the cash value of her policy is projected to be approximately $30,314.

Consider your options

Laddering term and permanent life insurance policies in some scenarios may be a more cost-effective and flexible approach to managing your life insurance needs over time. This strategy allows you to match your coverage with your financial obligations, helping to ensure you’re only paying for the coverage you need. Learn more about permanent life insurance and term insurance from Ameritas.

Additionally, incorporating a permanent life insurance policy into your ladder can provide added benefits, such as living benefits and lifelong protection, which can help you meet your long-term financial goals. By balancing term and permanent policies, you can help achieve optimal coverage and financial flexibility for both today and the future. Consult with a financial professional to customize a strategy just right for you.

Sources and References:

In approved states, life insurance is issued by Ameritas Life Insurance Corp. In New York, life insurance is issued by Ameritas Life Insurance Corp. of New York.
¹ Loans and withdrawals will reduce the policy’s death benefit and available cash value. Excessive loans or withdrawals may cause the policy to lapse. Unpaid loans are treated as a distribution for tax purposes and may result in taxable income.