Life insurance is essential for providing a financial safety net for clients. However, figuring out the appropriate amount and type of coverage can be complex, especially as financial obligations change over time. The ladder strategy offers a practical solution by customizing insurance coverage to meet these evolving needs.

What is laddering life insurance?

Laddering life insurance involves buying multiple policies with different term lengths to match the varying financial obligations clients can expect to have over their lives. 

For example, a client might purchase a ten-year, a 20-year, and a 30-year term policy. As time passes and financial responsibilities like mortgage payments, education expenses, and dependent care decrease, the coverage gradually reduces in line with these diminishing needs. 

This approach is not only cost-effective but also strategic. It avoids overpaying for a single long-term policy when the coverage needs are often higher in the client’s earlier coverage years. By aligning coverage more closely with the actual financial risk at different life stages, laddering life insurance can offer tailored protection while potentially saving on premiums.

How does this save clients money?

Laddering vs. one term policy

Suppose a 30-year-old client needs $1 million in coverage. They might anticipate their financial responsibilities decreasing as they pay off debts and their children become independent. Instead of buying a single $1 million policy for 30 years, they could purchase three policies:

1. $400,000 for ten years
2. $300,000 for 20 years
3. $300,000 for 30 years

The premiums for shorter-term policies are generally lower because the risk to the insurer is reduced. For example, the ten-year policy might cost $150 annually, the 20-year policy $200 annually, and the 30-year policy $300 annually. The total annual premium would be $650. In contrast, a single 30-year $1 million policy might cost $800 annually. Over the first ten years, the laddering strategy saves $150 annually, totaling $1,500.

Laddering vs. permanent policies

Permanent life insurance, such as Whole or Universal Life, covers the insured’s entire life and includes a cash value component. However, these policies are significantly more expensive due to their lifetime coverage and cash value features. For instance, a $1 million Whole Life policy for the same 30-year-old might cost $10,000 annually.

With the ladder strategy, the client’s total annual premium would be $650, substantially less than the $10,000 for a Whole Life policy. Even considering the reduction of coverage over time, the laddering strategy provides the necessary protection at a fraction of the cost.

Let’s look at an example of the cost over the first ten years:

• Laddering strategy: $650/year × 10 years = $6,500
• Single 30-year term: $800/year × 10 years = $8,000
• Whole Life policy: $10,000/year × 10 years = $100,000

By laddering, the client can save $1,500 compared to a single 30-year term policy and $93,500 compared to a Whole Life policy over the first ten years. This strategy ensures the client isn’t paying for more coverage than needed.

Case study

Consider this example: a 35-year-old policyholder named Jane, who has a $300,000 mortgage balance with 25 years remaining, needs $100,000 for children’s education in 15 years and requires $50,000 per year for 20 years for income replacement. 

Jane decides to ladder her life insurance with a $200,000 10-year policy for immediate debts and income replacement, a $100,000 15-year policy for education expenses, and a $300,000 25-year policy for the mortgage. The annual premiums for each policy might be $100, $150, and $250 respectively, totaling $500 annually.

Comparing this to a single 25-year, $600,000 term policy that might cost $700 annually, Jane saves $200 annually in the first ten years, totaling $2,000. This strategy ensures Jane is adequately covered without overpaying for insurance, and regular reviews help keep the coverage aligned with her changing financial circumstances, maximizing savings and efficiency.

Can permanent policies be used?

Yes, permanent policies can be used in a laddering strategy and can be beneficial because the cash value can provide advantages beyond the death benefit. For instance, let’s use Jane’s example again. Jane buys a Whole Life policy to cover her $300,000 mortgage, ensuring her family isn't burdened by debt if she passes away. She also purchases a Universal Life policy for her children's $100,000 education fund. Additionally, she buys a term or Whole Life policy to provide $50,000 per year for 20 years to replace income, ensuring financial stability.

How is the ladder strategy implemented?

Assess the client’s needs

The first step is to thoroughly assess the client’s current and projected financial obligations, including current debts like mortgages and car loans, future expenses such as college tuition, and the number of dependents and their financial needs over time. Income replacement must also be estimated to determine how much income would need to be replaced in the event of the policyholder's death.

Based on this financial assessment, you can determine the total coverage needed and how it could decrease over time. For example, a ten-year term might cover short-term needs like the early years of a mortgage or young children’s education, a 20-year term could cover medium-term needs such as high school or college tuition, and a 30-year term might cover long-term needs like mortgage payoff and income replacement until retirement.

Purchase the policies

After determining the coverage amounts and term lengths, as well as undergoing carrier underwriting, the policies are purchased. It’s crucial to regularly review the policies and the client’s financial situation to ensure the coverage remains appropriate. Major life events such as the birth of a child, purchasing a home, or a significant change in income may necessitate adjustments to the policy coverage amounts.

Ideal client profile

The ladder strategy is ideal for clients looking to save money while ensuring adequate coverage. This includes individuals with significant life milestones such as:

• Mortgages and loans: Clients with long-term mortgages benefit from adjusting coverage as they pay down their loans.
• Couple with young children: Clients can use the ladder strategy to help pay for educational expenses.
• Divorce: Post-divorce, clients can adjust coverage to reflect new financial responsibilities.

Next steps

Laddering life insurance is a great strategy for clients looking for customized coverage and cost savings. For more information on how we can help your clients obtain the best coverage, fill out the form below.