For many people, the amount of life insurance protection they need throughout their lives varies.
Many life insurance policies allow you to adjust your death benefit amount while your policy is active, but another way to ensure you’re only paying for coverage you need is by undertaking a strategy called the ladder strategy or the laddering strategy.
With the ladder strategy, you stack — or ladder — multiple term life insurance policies so that they expire over time, ensuring that you are only paying for the coverage you need.
How the ladder strategy works
The ladder strategy is designed according to a pretty basic principle: as you get older and pay down bills and increase your savings, your financial obligations decrease and you need less life insurance coverage.
Laddering multiple life insurance policies on top of each other so that they expire at different times leaves you only with the coverage you need, keeping your premium payments lower.
Life insurance policies are priced according to three major variables:
- How long the policy lasts (a 20-year term policy costs more than a 10-year term policy)
- How much coverage you want (a $500,000 policy costs more than a $250,000 policy)
- Your personal health (a person with a complicated health history will have a more expensive policy than a healthy person)
The ladder strategy takes advantage of the first two variables to keep premium costs low by ensuring that you’re are only ever paying for the amount of life insurance you need, and it takes advantage of the third variable by locking in low rates for each life insurance policy when you’re young and healthy.
Who should consider this strategy
If you’re applying for life insurance when you’re young and healthy, your rates may be low enough that it might not make sense for you to ladder your policies; the savings may not be worth complication, or the lowered benefit as you age.
But if you have a complicated health history or are an older life insurance shopper, you may want to look into the ladder strategy as a way of lowering your premiums.
If you’re turned off by the price of your life insurance policy – for example, if you need a large amount of coverage or if you have health issues that are inflating the cost – a ladder strategy can be one of the best ways to reduce the amount you’re paying for coverage.
When designing your own ladder strategy, the most important thing to do is to get a grasp of how much coverage you’ll need at different points in your life.
Think about some of the major reasons you’re purchasing life insurance coverage – pay off mortgage, send kids to college – and think about what the status of those financial goals will be in 10 and 20 years’ time. A financial planner can also help you do this.
Not sure how much life insurance you need? This free life insurance calculator can help.
This article originally appeared on Policygenius and was syndicated by MediaFeed.org.
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