Why do you need life insurance? Your answer to this question will dictate what kind of life insurance you should get, how much coverage you’ll need, and whether you need more than one policy.
Layering life insurance policies with differing terms and death benefit amounts is called “laddering.” Chad Boonswang, Esq., suggests that laddering multiple smaller life insurance policies can save you money in premiums over having one policy with a large death benefit over a longer-term. Find out what insurance you need to ladder so that you don’t pay more in premiums than necessary.
Whole Life Insurance vs Term Life Insurance
Whole Life Insurance is a policy that accrues present cash value that you can borrow against, tax-free if you borrow no more than you put in in premiums. A set death benefit is paid to beneficiaries regardless of whether there is a loan out under those limitations.
Term Life Insurance is a policy providing coverage for a set number of years, and if the insured lives past the end of the term the policy simply expire. It accrues no cash value, so the premiums are much more affordable than whole life policies.
In the following laddering scenarios, term life insurance policies will be laddered as appropriate to your life situation.
You Are A Professional In Your Late 20’s, Married With Two Young Children
Chances are you want life insurance coverage that provides income replacement for your family, pays your mortgage and pays for baby’s college expenses. Let’s say you just took out your mortgage and it is for $250K, 30-year-fixed. Your children are 6 and 8 years old. Your partner stays home to take care of them and the house.
You could add up all of those expenses and likely come up with $1 million or more in coverage, but the premiums on such a policy would be exorbitant. Frankly, if you are making $70K or even $100K an insurance company would be reluctant to write such a policy for fear that you would not be able to afford the premium payments long-term.
In this scenario, it makes more sense to ladder multiple policies.
● Policy #1: 10-year $500K policy for college expenses, covering children into adulthood
● Policy #2: 20-year $250K policy to cover the mortgage
● Policy #3: 30-year $250K policy for income replacement for your partner
Taking these policies out concurrently ensures you have maximum coverage when you need it. If you happen to die five years from the day you take out these policies, your family received $1 million but you will not have paid the premiums for a $1 million policy. If you survive the term, you let the policy expire and save money in premiums.
If you die 15 years after taking these policies out, your mortgage is paid and your partner receives a death benefit that replaces your income. Again, if you survive the term, letting the policy expire saves money. If you die 25 years later, your mortgage is just about paid off and your partner again receives income replacement.
You And Your Partner Own A Business And Have A Five-Year-Old Child
You both started this business in your twenties, and now you are in your early forties with a (surprise!) young child in kindergarten. You both have generous 401K plans that you continue to contribute to. You want to sell the business and retire in 20 years. You have 15 years left on a $400,000 mortgage.
● Policy #1: 10-year $400K policy for college expenses and income replacement
● Policy #2: 15-year $250K: policy to cover the mortgage, and income replacement
● Policy #3: 20-year $250K policy to help continue business operations
With these policies in place, once your child is grown you can let the first policy expire. Once the mortgage is paid off, you can let the second policy expire. And the third policy is not needed once you sell the business.
You Both Work, Are In Your 30’s And Have Two Toddlers
You both have well-paying, steady jobs, have been able to save and contribute towards retirement, and have two young children under the age of 5. You still owe $450,000 on your 30-year mortgage, which you took out eight years ago. If one of you died suddenly you know that the other could afford to pay for a funeral and to pay off any final expenses and debts.
As a couple, you want insurance for your children and the mortgage. These policies would meet those needs:
Policy #1: 20-year $400K policy to cover the mortgage
Policy #2: 30-year $300K policy for children’s living and education expenses
When the first policy expires, your mortgage will be only a couple of years from being paid off. When the second policy expires your children will be well into adulthood.
Talk with your insurance agent about your family’s insurance needs, and use laddering to provide coverage when you need it and save on premiums.
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Chad Boonswang, Esq., a life insurance lawyer in Philadelphia.
