Make Your Term Life Insurance Stretch By Laddering It

Getting life insurance is important.  Even if you’re single and think you don’t need it, you should at least get enough to cover your funeral and burial costs.  Trust me, if you die, the last thing your family members want to think about, worry about, is how to cover the funeral costs.

If you have children, the need for life insurance is even more important.  Your family will suffer greatly if they lose you.  They’ll suffer emotionally, likely for years.  You don’t want them to also suffer financially.

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Can I Afford Life Insurance?

Some people worry that they don’t have enough money to afford buying life insurance.

Frankly speaking, if you and your family went out to eat even just once this month, you have enough money for a modest term life insurance policy.

A good rule of thumb is to take out a policy that is 10x your annual income.  If you first get your term life insurance policy in your 20s or 30s and you’re in good health, the policy likely won’t cost you any more than $50 a month.

Most of us can easily find a place in the budget to trim $50, whether that be not eating out or canceling cable.  How can you afford not to get a policy?

We all like to think we will die of old age, but sadly, that is sometimes not the case.

life insurance ladderingStagger Life Insurance Policies To Make Them More Affordable

Let’s say you have your first child when you are 25.  This is also when you take out a 20 year term life insurance policy for $37 a month.  At this point in your life, you may have some student loans to pay off, and you’re likely making an entry level salary.  A life insurance policy of $37 a month may be all you can afford.  Sure, you might like a term policy for 30 years, but that is financially out of reach right now.

No worries.  Just use the laddering method.

What Is The Term Life Insurance Laddering Method?

Simply put, you take out a new life insurance policy before the old one expires.  For awhile, the two policies overlap.  For example, every 10 years, you get a new life insurance policy.  When you’re 35, you take out another 20 year term life insurance policy.  Now, for the next ten years, should anything happen to you, your loved ones will get to claim two insurance policies.  If each policy is for $500,000, should you die sometime between 35 and 45 (when the first policy expires), your family will receive $1,000,000.  This also overlaps when your child will most likely need the money as he goes from 10 to 20 and enters college.

Another bonus of this method is that now that you’re 10 years older, you likely have paid off more debts and you are probably earning a higher salary.  In other words, you’re better able to pay more for term life insurance.

Do The Math Before You Take Out Your First Policy

When you get a life insurance quote for the first time, do the math.  Is it cheaper to get a longer term policy or to ladder policies a decade or so later?

One important consideration is that you never know what will happen to you health-wise.  You may be in perfect health now, but 10 years down the road, you may have developed diabetes or have another health condition.  In that case, your second life insurance policy may be very expensive.

However, laddering is a good alternative if you can’t afford to pay for a more expensive, longer term policy when you initially take one out.

What have you done?  Did you opt for a longer term life insurance policy, or did you decide to ladder your policies?

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Last Edited: 5th August 2013

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Comments

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  1. says

    We’re planning on doing something like this. We’ve got one 20 yr term life insurance policy now, and will add another one in a few years. The term life insurance policies are so cheap these days that it doesn’t hurt to have a couple – our first policy costs less than $35/month for over 500k of coverage. Having those policies means I can have peace of mind knowing my family is covered should the worst case scenario happen.

  2. says

    Initially, I thought I didn’t require any insurance. No dependants, young, healthy and a good entry job. Now though, I think it would be a good option. The thing with insurance is that it always seems shrouded in mystery with agents trying to shove down your throats bloated policies that make it seem so expensive, but I think using laddering as you describe it offers an opportunity to get a policy that covers me while not denting my pockets and then ladder the policies accordingly as life and financial situations change.
    Great advice!

  3. says

    Remember that rates increase as we age. Based upon rates that we see for term life, laddering seems to make sense for non-smokers up to age 35.

    The rates don’t change much at all for people under 35. Then the rates double during the next ten years (up to age 45).

    Most people have an increased need for life insurance when they start families. Couples starting in their 20′s can benefit from laddering. Those starting in their 30′s may not fare as well.

    • Angel says

      Kevin, thanks for this! We are actually in our 40′s with a Primerica policy that has blended coverage built in – meaning we have a base policy for 20 years and then riders for 10 and 15 years. My husband was a smoker and it was the least expensive way we found to get the coverage we needed in the years we needed it most. We were already in our 30′s when we had our daughter and took this policy out. I wondered how laddering stacked up to our Primerica policy but with your insight I don’t have to do much digging.

  4. says

    Another way that people ladder is to buy two policies for differing lengths from the start. You buy less of the longer more expensive 30 year policy and more of the shorter less expensive 20 year policy. You will have more coverage in the earlier years when you still have to get your kids through school and less down the road. It also hedges against you developing health problems 10 years out and then paying higher premiums, which could happen if you defer buying the second policy. Our company has a tool for figuring out whether this form of laddering can save you money – http://insuranceladders.com.

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