Life insurance is something most of us have but hope we never need to use. Of course, most policyholders will have the standard 30-year policy with one insurance provider, but is that the best way to go about it? Do you really need the same amount of coverage at 35 that you do at 65? More than likely, the answer is “you don’t.” This is where the Ladder Life Insurance Strategy comes into play.
Who Needs Life Insurance?
The simplest way to answer this question is to say everybody needs life insurance. Whether you are single, married, have two kids, or have twenty kids, you need life insurance. Life insurance is a way to ensure that your loved ones will still have the means to continue living as if you were around after you are gone. At the very least, life insurance should be used to help pay for some of the expenses that come with someone passing.
How much Life Insurance Do I Need?
Many people will ask how much life insurance they need. Too much, and you’re overpaying for a policy you’ll hopefully never use. Too little, and if something does happen, it won’t affect you too much, but you’re loved ones could be left struggling financially. I’ll again stick to the most straightforward answer here; most experts will say to have a policy that is 15x your salary. This will allow your family to continue living their current lifestyle and have enough time to adapt or become more independent before the policy money is gone.
How Much Will Life Insurance Cost?
It’s difficult to nail down exactly how much life insurance will cost any particular individual as life insurance companies will look at many different factors to determine the premium you pay. Some of these factors include, but are not limited to:
- Your current age
- Medical history
- Any existing medical conditions\current health
- Length of the policy (more on this later)
- Coverage amount
Using these factors plus many others, insurance companies will come up with a number that can be anywhere from as low as $10-$15 to over $200 a month for the monthly premium.
So What’s the Ladder Life Insurance Strategy?
As mentioned earlier, most of us don’t need 15x our salaries in coverage at all points in our lives. Children grow up and leave for college, no longer needed as much support from mom and dad. Mortgages will get paid off, 401ks,529bs, and other investments will grow too. Really, with each passing year, the amount of coverage you need decreases, but your premium stays the same, of course.
The ladder life insurance strategy attempts to take the declining amount of coverage needed into account by taking out multiple smaller policies instead of taking out one large 30-year policy.
For example, let’s say you want to take out a policy at age 29 ½ (policy rates jump at 30). Your standard 30-year policy will last until you are about 60, which would make sense; however, by that time, you’d hopefully have children and have already raised them, and they are financially independent. Using the ladder strategy might look something like this:
- Policy 1: A 10-year policy of $500,000
- Policy 2: A 20-year policy of $500,000
- Policy 3: A 30-year policy of $500,000
Using this ladder strategy, you’d have 1.5 million dollars in coverage at your peak and then drop lower as each policy expires. Using the idea that you’d need the most coverage when you have younger children and have most of your earning potential in front of you, the shortest policy is worth the most. The next policy will last you through age 50, where in theory, you’ve established 401ks, 529bs, and other income-generating investments. At the very least, you’ve earned more and have fewer earning years in front of you, so the second policy is a bit less than the first. Finally, the third and final policy will last until age 60. After that, you are much closer to retirement, likely aren’t supporting children, and hopefully, have your mortgage paid off(or at least getting close!).
Let’s look at the potential savings here. Again, depending on many factors, your prices may vary, but let’s assume you are a healthy 30 year old looking for insurance. The three policies from our example would cost about $26 (10yr $500,000), $40 (20yr $500,000) and $61 (30yr $500,000) respectively.The most expensive policy is the longest one, as this is the one the insurance company would most likely need to payout. The total here comes out to be about $127 a month for ten years, $101 a month for the next ten years, and then $61 a month for the final 10.
$127 x 120(months) = $15,240
$101 x 120(months) = $12,120
$61 x 120(months) = $7,320
Now let’s take a look at how much a single 1.5 million dollar policy could cost. For the same scenario, a single 30-year policy could run you about $171 a month.
$171 x 360(months) = $61,560
Remember that length is a BIG cost factor, so the single longer policy is much more expensive, almost twice as expensive!
The total savings using the ladder life insurance strategy, in this case, would be $26,880 over the course of 30 years!
This is just one example, of course. To save even more, you might consider making the 2nd and 3rd policy less in coverage as well.
Why Doesn’t Everybody Use This Strategy?
Since the ladder life insurance strategy seems to save us so much money, why aren’t more people using it? However, there are two main reasons people might not want to implement this strategy.
Convenience – A big reason many people don’t use this strategy is a matter of convenience. Would you rather go through the process of applying, paying, and maintaining one policy or three? Of course, doing everything only once is much easier now and for the foreseeable future. We do have the option of automatically paying the monthly premium, so there’s that, but for most of us, the idea of keeping track of three policies isn’t ideal.
Don’t Want to Be Under-Insured – The other big reason people might not implement this strategy is that they don’t want to be under-insured. Knowing how much coverage you’ll need for the next thirty years at any point can be difficult, and the last thing you want is to wind up with too little coverage. Could this happen with a single policy too? Of course, it could. The difference is when starting with one, adding a second one down the line is relatively easy. Starting out with multiple policies, then discovering you’d need even more can get very messy and difficult to keep track of. So even though you could wind up underinsured with one or multiple policies, it’s much easier to correct the situation when starting with only one.
Which Should I Choose?
As with anything financially related, you’ll need to understand your situation and what you are willing to do to save money. The ladder example above is just one scenario. Your personal health, income, and other factors may make the ladder strategy more or less desirable. Before deciding to use this strategy or not, make sure you can make an educated decision. No one can predict the future, but we all have a general idea of where our lives are headed. Take everything into consideration and make the best choice for you.
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.