What Is Life Insurance Laddering?

My family bought life insurance for a few reasons. We were expecting our first child, we’d just bought a house and our savings were on the low end (thanks, down payment), so it felt especially important to have extra protection to cover our income.

Even if you’re tackling a lot of changes at the same time like I did, financial goals can follow very different timelines.

Replenishing our savings was a five-year goal, but paying our mortgage will take 30. Families often naturally go through fluctuations in how much life insurance coverage is most suited to their needs.

Laddering is a strategy where you stagger multiple life insurance policies to fit coverage to your needs. Here’s how to decide if this strategy is a good fit for your situation.

How Much Life Insurance Coverage Do I Need?

Calculating your life insurance needs doesn’t always feel straightforward. One rule of thumb says you should aim for five to 10 times your annual salary. Meanwhile, a typical employer-provided life insurance policy may only be equivalent to one year’s salary.

Kevin Mahoney, a Certified Financial Planner, says that a better measure of your insurance needs is the total of all the goals you want to fund. One goal might be getting your kids through college, while another might be paying off a mortgage or providing supplemental income for a partner later in life. “These are separate goals that have a different time frame and might require different amounts of coverage.”

How Does Life Insurance Laddering Work?

Laddering insurance refers to purchasing multiple, staggered policies that add up to the desired coverage, instead of buying one policy that covers the entire amount. 

“I think it’s a good way to minimize the costs for your family and avoid paying for coverage you don’t need once a life event has passed or been achieved,” Mahoney says.

Let’s say you have two main goals: raising your three kids through college, plus paying off your 15-year mortgage. Now, let’s say you were to try to cover both goals through one 30-year policy because that’s how long it’ll be until your kids finish school. If you did that, you could end up spending the second half of the term paying for more coverage than you need (because your mortgage will be paid off by then). 

Laddering could be one option to make your coverage better fit your specific goals and timelines. In this case, you might consider buying a longer policy to cover your family and a shorter one to cover the mortgage balance. In many cases, the two smaller policies could add up to a lower premium than one larger 30-year policy that bundles all your priorities together.

This can also be a useful way to extend the length of your coverage. We have different financial needs at each stage of our lives. If you buy insurance in your 20s, you may still be making major decisions about what your family life will look like, such as how many kids to have or where to live. As life changes (e.g. you have a new baby in five years, or move from renting a city apartment to buying a home in the suburbs), laddering life insurance policies can be an option to adapt your coverage to fit new needs. 

Separately, some families choose laddering because they want to strike a balance between term life, which is generally much cheaper, and whole life, which never expires (as long as your premiums are up to date). Splitting coverage between two policies can help people get some benefits of both term and whole life insurance: cheaper total premiums than going entirely with whole life, but some amount of permanent coverage.

Pros and Cons of Life Insurance Ladders

Applying for one life insurance policy can feel complicated enough. Planning multiple policies with different amounts and expiration dates can muddle the situation. Is laddering worth it?

Benefits of a ladder strategy

The top reason to consider life insurance laddering is that you may save some money, in Mahoney’s experience.

Life insurance premiums tend to increase as you age, and health conditions can bump you to a higher rate. If your goals are widely spaced (so it makes sense to have a range of term lengths) and you stay in great shape (so policies you buy later are still priced at a preferred rate), you’ve got the best odds of saving some money with a ladder structure.

This strategy can also be an easier way to adjust your coverage than making changes to an existing policy. Some insurance providers won’t let you change the term length or increase coverage on an existing policy. Buying an extra policy to extend some coverage out through the youngest child’s college years could be one way to cover new priorities.

Finally, some families feel a psychological benefit from separating their coverage into a ladder, Mahoney says. If you structure life insurance into a “kids and college” policy, a “mortgage” policy and a “replacement retirement fund” policy, it might be easier to connect on a gut level with how much you need for each goal and what term length makes the most sense for each.

Laddering downsides

Not all insurance companies will let you hold, or even apply for, multiple life insurance policies at once. That could potentially limit which insurance providers you’re able to work with. 

Fabric does not currently support applying for, or owning, multiple life insurance policies. Therefore, it isn’t possible to ladder policies through Fabric.

Having a single policy that covers everything you need can also be more streamlined. You only have one monthly premium to keep track of. And in some cases, that monthly premium may be similar to what you’d pay with laddering, anyway. If your goals are only separated by a few years, or you face significantly higher premiums on policies you buy later, then laddering may make less sense for you.

Finally, life insurance laddering doesn’t guarantee perfectly matched coverage every time. Term lengths and coverage increments may not align exactly with your financial commitments (for example, if you’ve got 18 years left on your mortgage but policies only come in 15- and 20-year options). 

If you’re arguing with your partner over whether to cut coverage short for a few years to save money or pad half a dozen policies, it might be time to step back and reevaluate. Convenience and peace of mind matter, especially if the cost difference is relatively small. A financial advisor can offer guidance on whether a ladder approach offers significant benefits in your situation.

Is Laddering Cheaper Than One Policy?

Some families spark an interest in laddering because they’ve heard it’s less expensive—which is true at least some of the time. 

If you buy one big policy when you’re at your youngest and healthiest, you’ll probably lock in your lowest rate, dollar for coverage dollar. But you could also end up making a lot of payments toward coverage you no longer need. 

If you ladder policies, you may pay a higher rate on a policy you buy in your 30s or 40s than in your 20s. But saving years’ worth of premiums may make up the difference. Alternatively, if you buy multiple policies early on, some policies may expire when your need for that coverage ends, taking the premiums with them.

Laddering may be an effective way to save some money on your life insurance coverage, and a well-structured ladder can give you a clearly organized sense of what your coverage is meant to protect. On the other hand, if your rates go up because you’ve limited your choice of providers or you pay more for policies when you’re older or less healthy, cost benefits could cancel out or even favor a single-policy approach.

Whether you go with a single policy or build a multi-part ladder, the most important thing is that life insurance is set up to keep up with your family and its changing needs.

NOTE: Term life insurance policies through Fabric do not currently support laddering.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

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