The term “laddering” is commonly used with reference to financial products such as CDs, but it can also be used with life insurance. Simply put, laddering is a strategy employed to have more than one financial product “expire” or mature at different dates to benefit the owner. With respect to CDs, this concept protects against reinvesting a large amount of money in a poor financial climate. This concept has been applied to life insurance since the need for life insurance tends to diminish over time as debts are paid off and assets grow in value. In other words, the financial climate changes. Over the past several years, I’ve learned (through other financial experts) the practice of laddering life insurance policies as a smart way to roughly parallel the declining need for coverage. Let’s take a look at this more closely:
Determining the length of a term product isn’t always a simple process. For example, a 35 year-old with young children may feel that a $1 million, 20-year term product would provide sufficient protection in the event of premature death. Assuming the youngest child is 5, then the insurance would terminate when all the children are independent or close to that point. However, it might be difficult to go from $1 million coverage to zero overnight. Maybe one child is not yet dependent or there are other reasons why having life insurance may still be very important. A better plan might be to ladder term policies by purchasing one 20-year term for $750,000 and another 30-year term for $250,000. This strategy would keep at least some life insurance in place until age 65 and the youngest child is 35.
Not always the best strategy. This example looks good on the surface, but when running quotes, it often times makes better financial sense to purchase just one longer term product. Policies with lower face amounts cost more on a per dollar basis than policies with higher face amounts. Also, most people don’t realize that carriers allow the face amount of a policy to be reduced with a commensurate premium reduction. 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.
Run the numbers! Over the years, I have run multiple quotes using the laddering technique. After performing a cost/benefit analysis, most of my clients have opted for just one policy with a longer term period. However, there have been many situations where laddering was the best solution and resulted in significant savings. It also gave my clients peace of mind, knowing they own two policies in case needs change later in life.
No rule of thumb. An experienced life insurance advisor can help develop a strategy that fits the unique needs of the individual. There is no “rule of thumb” when it comes to determining proper face amounts or term lengths for life insurance. As always, getting good advice is essential!
Greg Sanders Peachtree Insurance Advisors 678-236-1600