Do laddered term life-insurance strategies give significant savings over getting re-rated with shorter term policies?

Question

I have been reevaluating my life-insurance strategy and having remembered an article about using laddered term life insurance to give you a higher amount of coverage in the short term with reducing amounts of coverage in the long term. I am a prolific saver, and I have plenty of tax avoidance strategies in place for my long term savings, so I don't really need a discussion of term vs. permanent life-insurance. My question is whether using laddered policies can really provide a significant savings over re-rating when shorter term policies expire.

Here's one of many articles claiming that it can - Laddering Term Life Insurance- A Real World Example

Edit: To clarify per JoeTaxpayer answer, a little more explanation:

I first read about this concept a few years ago in a newspaper. The recommendation by the author was to replace your entire lifetime of expected earnings with insurance. If for simplicity that means $100k/yr, that would be about $1m/decade of insurance. After each decade, that money has been earned and is no longer expected, so you should reduce your insurance by the same amount. So assuming 30 years left, I would need $3m in life insurance now, $2m in life insurance 10 years from now, and $1m in life insurance for the last decade of work.

In my own case, I probably only need to cover a mortgage payoff and expenses for my wife until the children are old enough for her to be able to return to work. (She and I are both software developers, but she put her career on hold to care for our children.) I would probably buy a 10 year policy for $500k and a 30 year policy for $250k and let the first policy lapse when the term ends.

Answer 1

Not to pick your words apart, but I'm used to the word laddering as used with CDs or bonds, where one buys a new say, 7 year duration each year with old money coming due and, in effect, is always earning the longer term rate, while still having new funds available each year.

So. The article you link suggests that there's money to be saved by not taking a long term policy on all the insurance you buy. They split $250K 30 year / $1M 20 year. The money saved by going short on the bigger policy is (they say) $11K.

It's an interesting idea. Will you use the $11K saved to buy a new $1M 10 year policy in 20 years, or will you not need the insurance? There are situations where insurance needs drop, e.g. 20 years into my marriage, college fully funded as are retirement accounts. I am semi-retired and if I passed, there's enough money. There are also situations where the need runs longer. The concept in the article works for the former type of circumstance.

Answer 2

In some cases, we when we see an opportunity to save our clients money, without risking valuable coverage or diminishing benefits, we make certain recommendations for more affordable life insurance. One of these strategies is laddering (or layering) term lengths, or term maturities.

The strategy is simple.

While most people who are considering longer terms, such as 20 or 30 year term, purchase a single policy to fit their needs, the laddering strategy has you purchase two policies totaling the same amount of coverage you currently need, but with a shorter length term mixed with the longer term.

For example, instead of purchasing a 30 year term for $1 million dollars, you might purchase two policies for $500,000 each, one with a 15 year term, and the other with a 30 year term.

The result is typically a savings of 15%-25% on your term life insurance.

Just be aware that the plan going in is to let the first policy go (the one with the shorter term length) when its level term has expired. For example in a 15 year term, the premiums will be guaranteed to stay level the first 15 years, and then increase every year thereafter. There is typically a sizable jump in rates in that 16th year. Clients often see rates increase 8-10 times or more.

Therefore, it’s important you understand that going in, and realize you will most likely let that first policy go when the premiums increase, leaving you with the second policy through the end of its (longer) level term. You can crunch some numbers with our laddering calculator: https://www.jrcinsurancegroup.com/term-life-insurance-laddering-calculator/

Answer 3

I just did this in 2022 (eight years after this question was asked). I had a 10 year term that was about to expire, and I decided to get 2 new policies instead of one: A 10 year term and a 20 year term in equal amounts. I did this mainly to "fill-up" my would-be retirement savings 20 years from now, in case I die before then. I calculated I would need the full amount today, half of it 10 years from now, and none 20 years from now.

The key takeaways from my recent term life purchase experience:

1. Laddering is certainly cheaper than a single policy for the full amount. (And this makes sense since you have a lower payout if you die towards the end of the longest policy.) As for your question of getting re-rated after shorter term policies, that is risky in itself, especially if you are currently a low risk. Perhaps 10 or 20 years in the future you will have a health condition, or a riskier job, or multiple speeding tickets, or various other risk factors, all of which might raise your rates in the future.
2. I used a broker to quote multiple insurance companies. I spot checked a different broker that had some overlap in the insurance companies, and the prices were identical. I also spot checked some of the individual insurance companies on their own websites and once again, the prices were identical. This means life insurance brokers don't change the price. If you go through a broker they'll get a commission, and if you go directly to the insurance company, the insurance company simply makes more profit; they won't pass that profit on to you. I ended up using a broker and choosing the cheapest company that still had a great rating.
3. I called one of the brokers to ask a few questions, and when I mentioned I wanted multiple policies with different terms, the agent said, "Sure, you can ladder policies like that." (Proving the term is still in use.)
4. It took me almost a week before I sat down and finished the online application, and when I got the final approval and pricing, it ended up being about $75 more per year than the original quotes I had. I called to ask why, and it turns out that I had just passed my half birthday. So, when I originally got the quotes, my age rounded down to the nearest whole year, but one week later my age rounded up to the nearest whole year, which increased my rates. I pointed out how silly this was, and fortunately they were willing to back date the coverage start date by 1 week so I could save $75 per year. (Humorously, I had to sign an acknowledgement that I agreed I wouldn't actually be covered during that week...)
5. During the application process I noticed an option to add a "term rider" to my policy, but it didn't have much more information or prices associated with it, so I skipped it. But when I was on the phone with them to discuss backdating, I asked what the difference was between having 2 policies, one 20 year and one 10 year, or a single 20 year policy with a 10 year term rider attached (obviously for the same amount as the separate 10 year policy would have been). I was informed it would be identical, so I asked her to price it for me, and I'm pretty sure she was as surprised as I was that the term rider lowered the price by $60! So I ended up going with the 20 year term and a 10 year rider attached. I later figured out why it was cheaper when I saw the policy billing breakdown. Apparently each policy has a $60/year "Policy Fee" baked into the cost. Two separate policies means two separate fees, but one policy with a rider means just one fee. I don't know if all companies have this fee but I would certainly check for it if you're considering laddering. Note, just like a separate 10 year policy the 10 year term rider can be cancelled at any time, or it falls off in 10 years, and in either case the price at that time drops to just the price of the 20 year term policy.
6. One of the questions which I found interesting was whether I had taken a COVID test in the past 30 days. I hadn't so I don't have more info about it, but in retrospect I should have asked about it because I'm super curious if that, and subsequent follow-up questions could have changed the premium amounts or eligibility.

Answer 4

There is an opportunity cost of your future insurance needs,

1. They can grow with inflation.
2. You may lose your wealth due to some emergency.
3. Your kids may not become totally independent due to some reasons.

Here, the savings vs risks ratio is difficult to figure out. Hence it is always worth that extra cost to buy the larger and longer policy if you can afford it. Basically if you can afford it today, it will cost peanuts after 20 years.