Term Life Insurance Laddering Approach

In a blog post in April 2009, I wrote about Layering Term Life Insurance to provide different levels of coverage over a period of time.  Layering or laddering several different term lengths can help address different time horizons associated with different needs for life insurance.
As an example, a 35 year married man with two young children (ages 7 and 13), earning $75,000 annually, has 20 years left on his mortgage (currently $250,000).  He and his wife expect both children to attend college.  Here’s how a laddering plan would work for this client:

• Purchase a 30 year term policy with a $2,250,000 death benefit (Income x 30 years).
• Purchase a 20 year term policy with a $250,000 death benefit to pay off the mortgage (as the mortgage amortizes as he pays it down, extra benefit can go toward supplementing college funds).
• Purchase a 15 year term policy with a death benefit of $150,000 for the younger child’s college expenses.
• Purchase a 10 year term policy with a death benefit of $150,000 for the older child’s college expenses.

Essentially, he would have a $2,800,000 death benefit for the first 10 years, then the benefit would drop as each shorter term policy expired (as the need for each policy was eliminated), leaving him with $2,250,000 of benefit for the final 10 years.
I have done this laddering for several clients over the years, using separate policies.  However Legal & General America, through their Banner and William Penn companies has developed riders you can add to a base policy, rather than doing it though separate policies.  In the above example, one would purchase a 30 year base policy of $2,250,000, then add the following riders:  $250,000 for 20 years, $150,000 for 15 years and $150,000 for 10 years.  As each rider expires, the cost of the rider would disappear as well.
While serving the same purpose as purchasing separate policies, this method could prove to be less costly, as there wouldn’t be separate policy fees that are built into each separate policy’s premiums.  I expect to see other companies following Legal & General’s lead and come up with their versions of these riders.
As our term life insurance quote engine isn’t capable of quoting with these riders, feel free to contact us at 866-691-0100 ext. 105 if you would like to get quotes with these riders.

Posted in: Life insurance