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Laddering Life Insurance Policies

For most people, the need for life insurance decreases over time. During your working years, the need for life insurance typically decreases because your savings are increasing, the balance on your mortgage (and other debt) is decreasing, and the number of years for which your children will be financially dependent upon you is decreasing.

Similarly, for a person who needs life insurance during retirement (e.g., a married person with a defined benefit pension that provides insufficient survivor benefits), the amount of insurance needed declines over time because the number of remaining years of retirement that must be funded declines over time.

For example, a person’s life insurance needs might look something like this:

  • A current need for $1,500,000 of death benefits,
  • A projected need for $1,000,000 of death benefits for the period 10-20 years from now,
  • A projected need for $500,000 of death benefits for the period 20-30 years from now, and
  • No projected need for death benefits after 30 years.**

For this person, rather than buying a $1.5 million 30-year policy, there’s an opportunity to save some money by “laddering” life insurance policies. That is, break the coverage up into a few policies of varying terms: a $500,000 10-year policy, a $500,000 20-year policy, and a $500,000 30-year policy.

Using term4sale.com, I get the following premium estimates for a hypothetical male non-tobacco user, 30 years old, living in St. Louis, Missouri, with average health status:

  • $1,500,000 30-year policy: $2,050 annual premium,
  • $500,000 30-year policy: $730 annual premium,
  • $500,000 20-year policy: $465 annual premium, and
  • $500,000 10-year policy: $310 annual premium.

In other words, the ladder of three smaller policies results in a savings of $545 per year for the first 10 years, which increases to $855 of savings per year after 10 years, and $1,320 of savings per year after 20 years. Not the sort of thing that will dramatically change a person’s life, but enough to add up to a very meaningful amount over time.

An additional advantage to using a life insurance ladder is that, if you want to, you can get the policies from different companies, thereby diversifying credit risk and taking better advantage of the (limited) protection offered by your state guarantee association.

**When projecting how much life insurance you will need at some point in the future, be sure to include a guesstimate for inflation. $500,000 of death benefits 25 years from now will surely be worth meaningfully less than it would be worth tomorrow.

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