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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.

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    Anyone else notice the article is written by an insurance salesman? They make money off of creating new policies not old ones :) He does mention the fees have changed allowing for this type of plan to work. But why not get a good plan with a rider and then drop the rider when you no longer want the extra coverage? Any insurance experts out there to weigh in more? – Ross Mar 28 '16 at 16:43
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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.

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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/

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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.

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    1 can be accounted for (though I used round numbers to keep the explanation simple in my post). The exception is hyper-inflation, though if hyper-inflation occurs, no amount will be adequate. 2 may be best covered by other insurance mechanisms. 3 is certainly a risk of having children. With all these risks you mention, they are the same whether I die during my working years or live and work during those years. Life insurance is a great hedge against my death, but I'm not sure how well suited it is to the other problems. – Nathan L Dec 27 '13 at 20:59

protected by Chris W. Rea Feb 21 at 12:55

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