When building a long term financial plan, an essential step in the process is to determine how to minimize the risk of a catastrophic event that would negatively impact your family’s financial future. While morbid to think about, it is imperative to put the right coverage in place and to ensure that the coverage is as cost effective as possible.
While whole life insurance certainly has value and can be taken advantage of by families in particular situations and financial conditions (we will talk about this in future articles), term life insurance is typically the product of choice for many families, as the annual premium is much lower than whole life insurance.
When evaluating term life insurance coverage, consider using a strategy known as Laddering to structure your policies in a way that frontloads coverage when you need it most and trails off accordingly, reducing the cost of life insurance coverage over time.
How it Works (Example):
If your total recommended life insurance need is $3M, consider buying three $1M policies with different term expiration dates:
$1M – 10 Year Term
$1M – 20 Year Term
$1M – 30 Year Term
Structuring the policies in this way results in the insured individual having $3M of coverage early on, when they need it most. Over time, as liabilities decrease and net worth increase, their coverage need will decrease, which matches up roughly with the different expiration dates of the various policies.
When combining three $1M policies with staggered expiration dates against one $3M coverage policy with a much longer expiration date, the cost savings can be substantial, as insurance companies will require higher premiums for much longer for the longer term policy. With the ladder strategy, total premiums are cheaper from the beginning, and as the shorter term policies expire over time their premium goes away as well.
If you have life insurance needs and would like to explore if a term life insurance ladder makes sense for you, please feel free to reach out, our team would be happy to assist.