Life Insurance Ladder, Bogus Way to Save Money?

The world of personal finance contains no shortage of tips and tricks.  Many seek out slick nuances to highlight some “cool”  idea that promises to  “save you a bundle.”  The life insurance ladder strategy is no exception–big promise with a small advantage.

Heralded by some as an often overlooked strategy for saving you thousands on term life insurance premiums over your lifetime, we focus on this idea today to explore whether or not it really holds any significance.

So will the ladder make you richer?  Maybe.

Does the potential for those riches come with the precariousness of too little life insurance?  Read on…doing so might save you more money than you ever imagined.

Simple Life Insurance Ladder Example

The life insurance ladder strategy is simply a process of buying multiple term life insurance policies with different guaranteed level term periods.  You do this instead of buying one life insurance policy with one guaranteed level term period.

So let's assume you sit down and calculate your current need for life insurance at $1.1 million.  You're currently 35 and plan to retire around 65 so perhaps it makes sense to purchase 30-year level term life insurance.  Doing this will require you to pay a yearly premium of $1,020.

But wait!  The ladder proponents exclaim.  You probably won't need that $1.1 million death benefit for the entire 30 years.  As you work and save your money and as your debts and obligations reduce, your death benefit needs will also reduce.

So you could break that $1.1 million death benefit need up into smaller policies with different guaranteed periods.

Let's assume after much deliberation you determine that your obligations might diminish in such a fashion as to allow you to buy the following term life insurance policies:

  • A $500,000 10 year level term policy.  Annual premium: $217
  • A $350,000 20 year level term policy.  Annual premium: $253
  • A $250,000 30 year level term policy. Annual premium $311

The idea is that you figured our approximately when various components of your debts and/or obligations go away and you matched them up with the various term life guaranteed premium periods.

So you anticipate that within the next 10 years, $500,000 of your need for life insurance will go away due to lower debts or some financial obligation's ending.  By year 20, you anticipate another $350,000 of your current life insurance needs to end.

If you add up the premiums from above you'll notice they equal $781.  This saves you $239 per year right out of the gate versus just buying all $1.1 million as level 30 year term insurance.  Why didn't your agent tell you about this?  It must be about commissions.

Think of the yacht they bought with that $239 of your money?

The ladder will certainly save you money, but it does require that you know for certain when you can chop portions of your outstanding life insurance coverage off. So you'll have to be very certain right at the outset.  At a time when a lot of people tend to be most optimistic about their future.

Future is Bright Life Insurance

A Better Strategy to Protect your Downside

While I certainly have empathy for the pursuit to reduce term life insurance costs whenever possible, I want to remind you that life has a way of working out in ways that differ from our original plans.

That better financial place you thought you'd be in by the time your 45 doesn't always pan out so planning to drop a significant portion of your life insurance might not be the best advice you ever followed.

You do have options.  You are free to reduce the death benefit of any term life policy in the future, and this generally reduces the premium to the amount you would have paid had you bought this same policy at that lower death benefit originally.

For example, that same $1,020 annual premium on the $1.1 million 30 year term policy drops to a $601 annual premium if we drop the death benefit to $600,000 (i.e. reduce the death benefit amount by $500,000).

So instead of buying multiple policies, you could always just drop the death benefit if and when your financial situation allows.  This will absolutely save you money and it comes with the peace of mind knowing you can keep your death benefit longer if you need to.

If things don't work out quite as well as you planned, you aren't forced to drop death benefit or pay significantly higher premiums because you reached the end of the 10-year level guarantee.

But…there's still a chance the life insurance ladder comes out with a lower overall cost.

I want to give some credit to the purist of this idea.  I also want to preemptively disarm them when they email me to point this out.

Let's assume that things work out perfectly for the example above, but you choose my suggestion.  Instead of buying into the ladder, you simply by the 30-year term insurance for $1.1 million and end up reducing the death benefit when you would have lost the other term life policies.

The life insurance ladder saves you $2,650 over 30 years.  That comes out to about 24 cents a day saved

24 cents a day makes the “latte factor” look impressive by comparison.  24 cents a day to run the risk that you'll need to buy more life insurance or pay the non-level guaranteed premium on an old term life policy (which after one year probably wipes out all of the savings you'd achieve with the ladder).

Saving 24 cents a day leaves you in the potential position to lose some of your life insurance protection because you might not have the money to pay for the increased cost.  Ironic (or not) correlation often found with people whose lives don't work out as planned, they tend not to have extra money laying around.

A Small Gain If You're Perfect

The life insurance ladder requires you to have laser precision plans about your reduced obligations in the future.  But all that effort and risk of being wrong comes with a paltry upside expressed as money saved.  It sounds appealing because it sounds like a nifty trick to save money.

The idea seems unique and fresh because there's a very good chance that your agent doesn't mention it.

You might think it's because they want you to pay more premiums in order for them to collect higher premiums.  I suspect it has a lot more to do with them already knowing the above.

The theoretical construct that allows the life insurance ladder to take flight fails to place enough weight on the large negative consequences you face when you don't plan enough wiggle room for life's many bumps along the way.  It also ignores that practically everyone who owns term life insurance has an option to simply reduce their death benefit coverage and save money that way.

2 thoughts on “Life Insurance Ladder, Bogus Way to Save Money?”

  1. Thanks Brandon. Makes sense. I would also note that the need is unlikely to decrease in big chops. A gradual decrease is a better fit for a transition into retirement. Do any companies allow you to set a schedule of future decreases or do you always have to request each change at that time? For example in this case with a 1m benefit, could you set a schedule at age 60 to decrease by 100k each year?

    Also past the level period, a decreasing benefit option also makes sense as you are not going to have a 1m need one day and 0 the next. And the ART premiums to continue the 1m (after 30 years in this case) is typically prohibitive. Protective’s UL Term is the best I have found to follow this pattern. It is typically not the lowest cost but in the top 10 of lowest costs. For me, the small difference in cost is well worth the feature of having a level premium after the 30 year period in this case.

    • Hi Chris,

      I’m not aware of any life insurer that permits one to schedule face amount decreases. The policyholder would need to make a request for a face amount decrease.

      Thanks for mentioning the Protective product. I’m not completely sure I understand the point you are driving at about it, but please feel free to reach out by email with more details if you’d like to share more about this with us. You can always use the contact us form to send an email.


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