As anyone mired in a busy life can understand, it’s tough to know what life will look like thirty days from now let alone how things could change thirty years from today. A pregnancy, career change, big move or dream home… all of a sudden, your financial future looks vastly different than it did just last month.
The point: It’s hard to plan decades down the line, which can make the idea of determining how much life insurance you need a bit daunting. You’ve likely heard it’s smart to purchase life insurance when you’re young and healthy, but signing up for a monthly bill for the next three decades can feel like a major commitment with so many unknowns in the future.
While term life insurance policies are, in general, affordable, you may not want to pay for coverage above and beyond what’s really needed — especially if you have larger life insurance policy needs that are well over $1 million. Fortunately, most insurers will let you reduce coverage at any point, but a need to increase coverage will usually mean additional cost and going through the medical underwriting process.
This is where thinking outside the box, and building a life insurance ladder might make sense.
Why create a life insurance ladder?
For many people, expenses are higher when we’re younger. If you’ve got kids, for example, you likely want life insurance to help cover:
- A full-time nanny if your spouse would continue to work
- Daily expenses so that your spouse doesn’t have to return to work immediately and can focus on staying home with the kids after your death
- Your children’s college expenses
- Your children’s wedding expenses
- Your debts, like student loans, credit cards, or a mortgage
As your kids get older, and as you pay down some of the debt you carry when you’re young (like student loans or a mortgage), you may have less of a need for hefty coverage. This is just one example of how financial needs can fluctuate over time, but it’s a common illustration of how laddering insurance policies can help. Essentially, laddering sets you up with stacked insurance policies that may help you save money in the long run while still providing the coverage you need.
How do you ladder life insurance policies?
Let’s say that you’re a healthy 34-year-old female signing up for a 30-year, $1,500,000 life insurance policy at about $79 each month. Every month for 30 years, you’re going to spend $79, even if you don’t need the full $1,500,000 of coverage in 10-20 years. Over 30 years, you’ll spend $28,440 on premiums. If you built an insurance ladder instead, you’d purchase several different policies at the same time. Using the example above, you’d purchase:
- A 10-year policy for $500,000 (at an estimated $13/month)
- A 20-year policy for $500,000 (at an estimated $18/month)
- A 30-year policy for the remaining $500,000 (at an estimated $30/month)
In this example, you would have $1,500,000 in coverage for the first ten years for $61 per month, $1,000,000 in coverage for the next ten years for $48 per month, and $500,000 in coverage for the last ten years for $30 per month. Over 30 years, you’d spend $16,680 on premiums, saving $11,760. You might even consider looking at the different steps in your insurance ladder as financial goals that you and your family are checking off your list. For example, you might set up your ladder of policies like this:
- A 30-year policy that replaces current income and potential future income (to cover your spouse and kids now, or just your spouse in the future)
- A 20-year policy that can pay for the expenses of raising kids (this could include college or wedding costs, a full or part-time nanny, or replacing your partner’s income until your kids are old enough to not need someone home with them full time)
- A 10-year policy that covers your new family’s debt (a mortgage, your student loans, etc.)
This could make putting together a ladder strategy easier, even if you’re not entirely sure what your family’s financial and lifestyle future look like. While there are potential cost savings from laddering policies, you’ll also want to consider what kind of financial legacy you want to leave your loved ones. You might decide that keeping the $1,500,000 policy for a full 30-year term, while maybe the full amount is no longer necessary, is the financial safety net you want to provide. Or, you can reach out to your life insurance company and ask to reduce the face amount by half.
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How to ladder life insurance
To build the ladder, you’ll need to take a few steps beyond what you’d do if you were traditionally buying a single life insurance policy, which is why it’s wise to speak with a financial planner to help you determine what amount to purchase. Laddering policies can be challenging to determine the right coverage amount for your loved ones and ultimately, you don’t want to put your family potentially at financial risk. When evaluating your needs, consider:
- Estimate your expenses. To build a successful life insurance ladder, you’ll need to estimate your expenses for each new season of coverage (or when one policy expires). This means you’ll need to think through what your expenses will look like right now, when you have kids (or as your kids grow up), and as you near retirement. You might ask yourself what the expense of raising your kids will be, or how much your debt will cost you at each stage of your life.
- Estimate your worth. This part can be a little bit harder to do. To estimate how much insurance you’ll need during each season of your life (or on each step of your insurance ladder), you’ll need to know how much money you might feasibly bring in during that time period. Most people expect to have their total net worth increase with time. This might mean you need your insurance to replace a higher salary at different steps on the insurance ladder, even if you have fewer expenses during that time.
- Shop around. You’ll pay this bill for many years, so there’s no reason not to get more than one quote. It can also be helpful to compare the total cost of your insurance policies against a single policy to make sure a ladder strategy is actually less expensive. Additionally, be sure to check the industry rating for each company you contact.
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How do you know if laddering will work for you?
A life insurance ladder is largely dependent on knowing your family’s financial future. So, if you have too many “question marks” or variables in your plan, this strategy might not work for you. For example, if you and your partner haven’t started having kids yet and aren’t sure when that might be on the horizon, haven’t bought a home (or have, but know it’s not your forever one), or are considering taking another big financial leap like starting a business – a single life insurance policy may be simpler to ensure you have the coverage you need over time.
On the other hand, if you already have young kids, know how long it’s going to take you to pay off your mortgage (or have a good rough estimate), and are aware of your family’s current debt load – a ladder strategy may be easy for you to build. For many people, a single term life insurance policy provides an affordable and adequate financial safety net during the years your family needs it most. But, if you have a need for larger coverage amounts and want to benefit from the cost savings that may be available with a ladder strategy, speaking with a financial planner can help you get organized and find the different types of term life insurance policies that best fit your family’s financial needs both now and in the future.
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Mary Beth Storjohann, CFP® and Founder of Workable Wealth, is an author, financial planner and accountability partner working to help clients in their 20s-40s across the country make smart, educated choices with their money. Her recent accolades include the “Top 40 Under 40” by Investment News, “10 young Advisors to Watch” by Financial Advisor Magazine, and “10 of the Best Personal Finance Experts on Twitter.” She frequently appears on NBC as a financial expert and her expertise has been featured in The Wall Street Journal, CNBC, Forbes and more. Opinions are her own. Haven Life Insurance Agency offers this as educational information. Haven Life does not offer investment or tax advice and encourages you to seek advice from your own legal counsel, investment advisor, or tax professional.