Life insurance is an important part of any solid financial plan. Yet, simply purchasing a policy and an amount of coverage at random isn’t really considered a viable strategy. In fact, for those who have large dollar needs to cover, it may be necessary to use various methods and techniques where coverage is split into differing components based on dollar amount and time frame. One way to do this is through laddering.
While the term laddering is often used with regard to bonds and CDs for retirement income, it can also be used with life insurance – and it is a great way to apply coverage, as certain needs tend to diminish at different times based on the payoff of debt, the growth of assets, and changes in the life of the insured and his or her loved ones.
What is Laddered Life Insurance and How Does It Work?
With laddering, a policy holder purchases several policies with differing face amounts and term lengths rather than buying just one single large face amount policy. The process is typically broken down into four key steps. These include:
Step 1: Identifying the primary needs of the insured.
Step 2: Determining how long the insured needs coverage. (Because different needs may have different time frames, the policy terms can be purchased to accommodate for each.)
Step 3: Determining the face amount of coverage for each need.
Step 4: Purchasing multiple term life insurance policies that match each need exactly instead of buying one policy to “blanket” cover all of the needs together.
Overall, the process of laddering can essentially allow an insured to purchase the correct amount of coverage in the most cost effective manner for each of his or her individual and specific needs.
As an example, let’s say that an individual currently needs $7 million of current coverage, decreasing to $2 million over time. Therefore, his term life insurance policy purchase strategy may look like the following scenario:
- $4 million of 30-year term
- $2 million of 20-year term
- $1 million of 1-year term
In doing so, the insured may also be able to save a considerable amount of premium dollars over time. This is because the shorter-term policies will expire (as will their premiums) when the short-term needs expire.
When using a concept such as laddering, it is important to work with an insurance advisor who is knowledgeable in this type of technique. It is also important that each policy purchased has a specific purpose, and that the premium for each is affordable. Otherwise, you could end up with a myriad of coverage without any specific plan or direction.
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