The Laddering Concept
Most people are familiar with the concept of laddering when referring to certificates of deposit (CDs) or other financial products. Laddering financial products ensures that the expiration dates (or maturity dates) of investments don’t occur at the same time.
Laddering is a strategy whereby more than one financial product “expires” or matures at different dates to benefit the owner.
This strategy guards against reinvesting a significant amount of money in a financial climate that would be unfavorable to the owner. The goal is to maximize potential earnings.
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Laddering Concept Applied to Life Insurance
The Laddering concept is applicable to life insurance since the need for life insurance lessens over time. As most people age, their financial obligations are gradually paid off and/or their financial assets grow in value.
The standard advice regarding life insurance is to own the maximum amount when loved ones depend the most on your income. For the typical family, this means purchasing a 20 or 30 year term policy while children are very young. However, it doesn’t take into account the diminishing need for life insurance.
Basically, when the need to replace income in the event of premature death is highest, then it’s time to step up the amount of coverage. As the need to replace income decreases, it makes sense to step down the ladder of coverage.
Over many years in the industry, I learned a lot about the concept of laddering life insurance policies. There are different ways this can be accomplished. We will look at using laddering life insurance with term life only and with guaranteed universal life insurance.
My Bankrate Interview on Laddering Life Insurance
A few years ago, I was interviewed by a freelance writer who was in the process of doing research for an article on laddering life insurance for Bankrate.com. She came across my website and discovered I was one of the few people who had insights into the concept of laddering life insurance. We talked several times as I educated her on the concept. The article, Climb a life insurance ladder and save, can be found here.
The author was kind enough to give me credit in the article, however, the examples she used are a little confusing. Nevertheless, it is a decent article and brings up some good points. So, please check out the article for more in-depth information on laddering term life insurance policies.
When Laddering Life Insurance Makes Sense
Let’s take a 36 year-old with young children who had determined that an appropriate amount of coverage is $1 million. After some quick research, this person finds that a 20-year term product would provide sufficient protection in the event of premature death.
Assuming the youngest child is 4, the insurance policy would end when the children (it is hoped) are no longer dependent on a parent. However, going from $1 million coverage to no coverage might not be the best idea. Perhaps one child is not truly independent or there could be other reasons why maintaining some life insurance coverage would be important.
An alternative strategy might be to ladder term policies by purchasing the following:
- A 20-year term for $750,000
- A 30-year term for $250,000.
With this alternate strategy, some life insurance would stay in force unit the age of 66. The youngest child would be 36 at that point. Again, several things could happen. Let’s say the adult child has a severely disabled child and is in bad financial shape. There are many other possible scenarios where this strategy could be more practical.
Laddering Life Insurance with Term and Guaranteed Universal Life
The example above would work well if the insured opted for a 20-year term policy and a guaranteed universal life insurance policy (instead of a 30-year term policy) for the same amount. This is no different than laddering term policies, since guaranteed universal life policies are basically “term for life” policies or what we refer to sometimes as “term to age 100”.
Laddering Life Insurance is not always the best strategy.
Sometimes – especially for younger people — is can make more sense to buy just one 30-year term policy. Again, refer to the bankrate article for specific examples and rates. Policies with higher death benefits cost less per dollar than policies with lower face amounts. This reduction in face amount can occur as the need for life insurance diminishes.
So, the amount of premium saved by laddering term policies is not always as significant as one might think. Of course, when laddering a term policy with a guaranteed universal life policy, the premium will be higher. It’s a significant difference to provide permanent life insurance and a guaranteed tax-free death benefit to loved ones (regardless of the age at death).
Run the numbers!
We have prepared hundreds of quotes using the laddering strategy. After analyzing the numbers, most of our clients decided to apply for just one policy with a longer term period. We have had many clients opt for the laddering concept and applied for two policies.
Clients who have opted for one term policy and one permanent (or guaranteed universal life) policy have done so primarily due to the peace of mind it provides.
No Rule of Thumb
Determining the proper amount of life insurance and the best length of time to keep the coverage varies widely. There are many factors to consider and it’s not always a matter of crunching numbers. We will be glad to answer your questions and guide you through the process of finding the best coverage for your situation.