Life insurance policies are a reliable way of safeguarding your and your family’s future. Financial hardships are unpredictable, and they affect every individual differently.
As a young person, you may not have to worry about things like financial planning, mortgage, or securing your children’s future, but nonetheless, they are critical decisions in our lives. However, as time passes, obligations and responsibilities will grow and will need your intervention at some point.
Every individual’s financial goals vary with time and their financial situation. Insurance laddering helps you strategize a sound financial plan to include your present and future needs. It allows you to address specific needs along with different timelines of your life and minimize the risk of financial instability.
Brandon Roberts of The Insurance Pro Blog explains the ladder strategy, “The life insurance ladder strategy is simply a process of buying multiple term life insurance policies with different guaranteed level term periods.”
Here is how you can decide if an Insurance ladder scheme is the way to go for you.
Understanding Life Insurance Ladder strategy
In simple words, insurance laddering refers to purchasing multiple insurance policies with different coverages and durations. Also known as insurance stacking or insurance layering, these strategies can save you thousands of dollars in premiums if executed properly.
For instance, let’s say you have $5000 to invest in an insurance policy. Instead of purchasing a single long-term policy, you can split that money into 3 different policies of varying tenures.
- A 5-year policy can help you take care of smaller intermediate financial obligations like student loans.
- A 10-15 year policy can be used to cover your children’s education and other liabilities
- A 20 year or longer-term policy can be your ticket to a safe and independent retirement. Many people also use these policies to pay off their mortgages.
Is Laddering Better Than One Policy?
Although laddering can be cheaper in terms of monthly premiums in some cases, that’s not the end of the story. If you go with one long-term policy that gives you better coverage at low rates, that would be ideal too. But in that scenario, you might end up making payments towards coverage that you no longer need.
Let’s say you break up your investment into smaller policies. A short-term policy will expire roughly around the time when you would not need that coverage anymore, taking the premiums with them. Laddering will give you a concise idea of which coverage is relevant to a particular timeline or event of your life.
Downsides of Ladder Strategy
- Ladder strategies can be a bit more complicated in comparison to straight-term life policies. Calculating the adequate coverage to investment ratio needs a deep intervention and understanding of financial planning.
- The cash value of your coverage decreases over time due to inflation. Future purchases of policies will also cost you more in terms of premiums.
- Coming with a suitable ladder strategy can be a daunting task if you haven’t predefined your future goals yet. Although with proper planning and consulting, this should not be a major issue.
- Some insurance companies don’t allow or support insurance laddering.
Whether you opt for a single policy or ladder strategy the goal of insurance policies is to provide sustainable financial support to your family in the future.
If you have pre-existing health conditions or travel/career plans that could drive future policy rates up, then you must consider insurance laddering. Purchasing bulk coverage at a young age through multiple policies would be the most favorable option in such a case.
With single policy schemes, accommodating changes that come along the way can become difficult to manage. If you are able to predetermine the nature of coverage you would need in the next 30 years, insurance laddering will certainly give you an upper hand in many situations.
If you would like to learn more about the ladder strategy, we can help. Please contact us today for more information.