A Guide to Life Insurance Laddering

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How Life Insurance Ladders Work

When you build a life insurance ladder, you purchase term life insurance policies (temporary policies that last for a set period of time) with different term lengths. For example, you could purchase three different $300,000 policies at one time so that one policy lasts for 10 years, one policy lasts for 20 years and another policy lasts for 30 years. Or you could buy a single 30-year life insurance policy and purchase extra policies later on as your financial needs change.

For instance, you could buy a $500,000 30-year policy shortly after you get married. If you decide to buy a house, you could then purchase a $400,000 15-year policy and use those funds to cover your half of the monthly mortgage payments. If you have children and you want to help pay for their college expenses, you could get a $100,000 10-year policy.

Should You Build a Life Insurance Ladder?

Creating a life insurance ladder could be a good idea if you want to have access to certain benefits. For one, you can reduce the cost of your life insurance premiums by purchasing policies with different lengths instead of getting one expensive 30-year term life policy or a whole life policy. Plus, as the shorter policies come to an end, the cost of your insurance premiums will automatically go down.

Through life insurance laddering, you can also address the different financial obstacles that you’ll face at different stages of your life. After all, the amount of life insurance coverage that you need might change over time. If you only have as much coverage as you actually need, you can use the money that would’ve gone toward covering insurance premiums to boost your savings or pay off debt.

But life insurance laddering doesn’t work for everyone. Buying a series of term life policies at once could cause problems if you don’t know what financial obligations you’ll have in the future.

What’s more, the concept of life insurance laddering is based on the assumption that you’ll need more life insurance when you buy a house and have kids and less insurance as you get closer to retirement and your children purchase their own policies. But having less insurance in your later years could backfire if you need additional money to purchase another house or deal with an emergency.

Bottom Line

Work with Purpose

There are benefits and drawbacks to creating a life insurance ladder. Laddering could be helpful for families who want to save money on insurance premiums or for those who can map out the financial needs they expect to have in the future. On the other hand, if you don’t know what the future holds for you and your loved ones, laddering might not be the best strategy to use.

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