What is a life insurance laddering strategy?

One’s insurance needs vary throughout their lives. Generally, less coverage is needed in one’s young and single years. But, needs do increase after major life events such as getting married, buying a house, and having children. Then, as more time passes, debts and obligations decrease, and coverage needs decline simultaneously.

So how does one ensure they have the right amount of insurance coverage throughout their lives? More importantly, how does one ensure that we are not overpaying for coverage that we may not need in future years?

One solution is laddering, also known as a life insurance ladder strategy, a comprehensive plan that ensures you have multiple coverages in place to address specific needs and periods of your life and are paying only for the amount of coverage you need during these periods.

How does a life insurance ladder work?

At its most basic level, life insurance laddering entails purchasing multiple life insurance policies with different coverage amounts and durations. Each of these individual policies expire at different times. They are chosen to address specific protection needs for specific periods of time in your life. For example:

• a 10-year policy to cover your outstanding student debt
• a 20-year policy to help protect your children from their youngest years until they can complete their education and gain financial independence, and:
• a 30-year policy to cover the amortization period of your mortgage

This can be executed two ways: through a base life insurance policy with term life riders added to it. Or by purchasing a set of individual life insurance policies, purchased simultaneously.

You can save substantially on your combined life insurance premiums by enacting an insurance laddering strategy, especially through a base-policy plus rider strategy.

How to save money on life insurance with a ladder

Foremostly, you purchase the bulk of your coverage when you need it most, using favourable rates due to your age.

As time passes, and you catch up to expiring debts like large loans or mortgages, your coverage will be timed to also decrease as shorter duration policies terminate. Once those policies terminate, you no longer pay their premiums.

Some insurance companies also offer discounts on premiums when an applicant takes out multiple policies and/or riders.

Lastly, laddering offers a great way to combine and mix term life and permanent insurance coverage. A policyholder can have permanent life insurance as their base policy, and add one or more term riders layered on top to achieve the coverage they need.

A life insurance ladder can seem confusing, but a real-life example tends to help those curious insurance seekers understand the concept better.

For example, say you’ve just finished a specialized graduate program like medicine or law. You’re now starting your career, getting married, perhaps starting a family, and purchasing your first home. Wow, that’s a lot to cover, but not an uncommon situation for many first entering their professional careers.

And while it is a lot to cover, those obligations all occur over different time periods. Your student debt can be taken care of in 10 years, your children most likely leave your care in their 20s, and your home will be paid off in 30 years. You need the most coverage in those early years, but once your obligations have diminished in the last years of your mortgage, you simply don’t require the same amount of coverage.

Here’s what a life insurance laddering strategy versus just term life insurance might look like in that situation.

*Premium figures for a 32-year-old non-smoker male.

Do I need a life insurance ladder?

Using a  life insurance ladder is largely dependent on your future plans. For many people, expenses decrease over time and, correspondingly, so do their coverage needs. For example, once you’ve paid off your mortgage and children are financially independent, the amount of insurance you actually need would be much less than before.

Laddering is for you if:

• You have large – but temporary – obligations: A mortgage or other debts, cost of living for children, funding children’s education, and other needs that taper off slowly as you age. Although you need a large amount of immediate coverage, this will greatly decrease as time passes.
• You have pre-existing health conditions or hazardous hobbies/travel plans that will result in higher future insurance rating, and thus increase your cost of insurance down the road.

But, if you don’t have solid plans for your future, a life insurance ladder may not be your best option at the moment. If you are very young without any liabilities or dependents, simple term life insurance may make more sense for your immediate needs.

This is also true if you want to leave a large financial legacy for your loved ones, irrespective of your needs.

How a  life insurance ladder differs from a single term life insurance policy

Can I use a ladder strategy to increase my coverage over time?

Speaking strictly on a technical level, a ladder strategy refers to coverages purchased at a single point in time. And if you purchase multiple coverages with varying lengths at one time, your initial coverage will always be of the highest value and reduce with time as shorter duration coverages lapse.

You cannot establish coverage that only starts a few years later since it will require new medical underwriting at that point in time.

So, while not laddering as we described it above, you can always purchase multiple life insurance policies over time that allow you to increase coverage. Additionally, some life insurance providers and policies have the option to increase your coverage amount once the policy goes into force. This is typically accomplished through optional policy riders such as guaranteed insurability – though, additional premiums are required for this rider.

How do I start a life insurance ladder strategy?

Most major Canadian insurers allow a form of life insurance laddering through their coverage options.

Some insurers such as RBC allow you to layer multiple term riders on top of your base coverage, within one policy. Others, such as BMO, let you apply for multiple separate term life policies simultaneously, to implement a ladder strategy, while availing a multi-policy discount on the premiums.

PolicyAdvisor can suggest the best ladder strategy for you, as well as the right insurer to match your needs. Schedule a call today and start building your own insurance ladder with one of our licensed insurance advisors.