Save Money on Life Insurance with Ladders

[Post by Sam at Coverpath. While I have heard of the idea of insurance laddering I never knew there was tool to help plan for it]

People are always trying to save money on their life insurance. Search around and you will find a lot of common wisdom on the topic. But one thing you won’t often hear about is laddering. At Coverpath, we’ve found that using a life insurance ladder can save people substantial amounts of money by making sure they don’t buy more coverage than they actually need.

Laddering is a way to structure your life insurance coverage so it goes down over time rather than it staying level.

Why would anyone want that?  Well, for starters, buying less life insurance (only the amount you actually need) means you pay less. And sometimes way less.

But there’s another reason we like life insurance laddering.  If you buy a ladder with two different companies, you are essentially spreading out the risk of a life insurer not paying your claims across two different insurers.

What is Insurance Laddering?

So how exactly does laddering work?  Let’s take an example.  Say you decide after talking with an agent or using our life insurance calculator that you need $1 million of life insurance coverage over 20 years. Here’s what that really means:  ”If you die today you will need $1mm to protect your surviving family for 20 years.”  That means it takes $1mm to pay for the clothes, food, healthcare, school, and pretty much everything else your family will need that your income would have paid for if you were still working.

But what if you don’t die today?  What if you die in 10 years?  Well, now there are only 10 years left out of the 20 that you actually need protection for. So, theoretically, you might only need half that amount of money to pay for everything your family would need for 10 years.

The basic truth is that your life insurance needs generally go down over time.  So if we were to draw a bar chart of your life insurance needs at various years, it would look something like this:

Any sophisticated life insurance analysis tool, like the one we are building at Coverpath, will lay out your life insurance need over time in this way. So an ideal life insurance policy would be one whose coverage amounts vary by year exactly in the same way your life insurance needs do.  Unfortunately, no such policy exists. But what we can do is create a ‘ladder’ with 2 separate policies, which ends up looking something like this:

Hopefully now you can see that the chart above looks like a ladder, which is where this strategy gets its name. We’ve found that on a $1mm you can often save up to 30% using laddering over the life of a policy.  And more than anything, we want to encourage you to buy enough life insurance to protect your loved ones. If paying 30% less you are more likely to get the right amount, than we are all for it.

Trying to figure out whether ladders will save you money is not always easy.   First you need to figure out your needs over time and then you have to compare a lot of policy combinations.  To make things easy we created a simple tool for this at insuranceladders.com.  In less than a minute you can see whether it works for you and how much you could save with real quotes comparing laddering to a single policy.

2 Responses to Save Money on Life Insurance with Ladders

  1. This seems like an interesting concept that could have some true value to it. Unfortunately, I feel most people would find this to be too complex to execute it properly.

  2. Hm. I wonder…

    Well, I mean I understand the concept that as the kids grow up and get out of the house and the mortgage gets paid off, a couple needs less coverage to help out in the event one wage-earner is lost.

    But consider this: As they get older, eventually neither of them can work. Even though the mortgage may go away by the time they reach their dotage, health care costs and inflation rise to take its place. Medicare is not as cheap as some may think; it barely touches the cost of drugs, and it does not cover nursing care, which can be spectacularly ruinous. Forty percent of American adults end up in nursing homes.

    When one marital partner dies, the other gets her or his choice of Social Security benefits: her own or his. This means her SS benefit effectively drops in half at a time when the couple has already burned through a fair amount of retirement savings. And at this time in her life, her health care costs are rising, too. If he has died of a wasting disease that required a substantial amount of nursing-home or home health care, their savings may already be partially or fully drained.

    In that scenario, which is not uncommon at all, a decent life insurance policy could save the surviving spouse from an old age in poverty.

    The insurance ladder concept is interesting and could in theory save you money. Unfortunately, the tool will not give results unless you’re under 65, which I don’t happen to be. Enter “64″ as the age, and it will (erroneously) tell you that you don’t need insurance coverage.

    As a practical matter, insurance to help your adult children bury you and cover taxes on your estate or to keep a surviving spouse out of penury should you diddle away all your savings on a nursing home is prohibitively high for the elderly. As we can see here, it may even be impossible to buy at all.

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