For those who have others that depend on their income, life insurance is a foundational piece of physician personal finance. At the beginning of your career when you don’t have much in savings, you potentially carry significant debt such as a mortgage, and when you may still have lots of expenses related to your children such as childcare and future educational costs, many physicians find that their life insurance needs can be quite substantial. Of course, the larger the policy you take out, the more expensive.
Because of this, on the physician communities, we often discuss the concept of laddering life insurance policies. This can be a savvy way to not overpay for coverage you won’t need later in life but that you do need currently. Laddering life insurance involves purchasing multiple term policies with different lengths and amounts to suit your changing needs over time (children grow up and finish college, you reach financial independence, you pay off your primary residence mortgage and/or real estate investments, etc.). Below, we cover who the ladder strategy is a good fit for, and give an example of how it can work so you can develop a plan that works best for you.
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Where to Buy Life Insurance Policies
PolicyGenius: PG is well known in the insurance space, and are a very convenient way to shop for life insurance as they will run rates across the major companies online within minutes, and then get on the phone with you to discuss your options. Contact them here.
Pattern: This option will allow you to enter your information and immediately begin generating quotes, as well as schedule a meeting with the great team at Pattern to discuss the options and figure out which plan is best for you. Contact them here.
Who Should Consider Laddering Life Insurance
Laddering life insurance policies can be beneficial when:
You know your future expenses– such as those related to your children or mortgage - will decrease over time.
You expect you’ll need some coverage later on in life, but longer term policies (such as a 30-year term) are prohibitively expensive for the entire coverage you need now.
You want to pay premiums for the coverage you need at different stages in life when you need them, not the coverage you needed a decade or two previously.
You feel you may achieve financial independence earlier than you are conservatively estimating, and want to have more options to drop some of the unnecessary coverage without having to drop the entire policy and requalifying for a new policy, potentially at a new health status or elevated age where your new policy could be much more expensive or you may not qualify for a new policy.
To determine if laddering life insurance is a good strategy for your situation, consider how much your family would need to maintain their lifestyle and current financial goals if you passed away today. Then compare that to what you predict your family’s situations and needs will be 10, 20, and 30 years down the road. If the needs significantly change within those time frames, although laddering your policies may add complexity, laddering could save you a lot of money and should be considered.
A mistake many people make is just assuming they will let the current policy pass and then buy more according to their needs in the future. Keep in mind that life insurance premiums typically increase as you age, so buying more coverage down the road will likely cost you a lot more than it does now and may be prohibitively expensive. The other thing to remember is that you may not qualify for life insurance in the future if your health status has significantly changed, so if you know you will need the coverage, it’s better to secure it when you’re young and healthy.
When forecasting your financial future, be as realistic as possible. It’s better to have too much coverage than too little, especially as term life insurance is generally more affordable than most insurance policies. Paying for a little more coverage than you need likely won’t break the bank, but not having enough coverage could significantly impact the lifestyle your loved ones can maintain.
Who Should Likely Not Ladder Policies
Laddering life insurance policies is a great money saving strategy when you have a good idea of your future expenses and how they will decrease over time. Laddering may not be the best strategy if:
You will end up overpaying for your future needs. For example, if you are buying a policy now but don’t yet have dependents or a mortgage, you don’t want to buy a large policy that takes into account future anticipated needs just yet.
You don’t anticipate your future insurance needs changing. For example, if you have a chronic medical condition that will require increased expenses over time or believe that your future expenses are going to continue to be the same and you aren’t saving significant amounts of money in the interim, it may be better to have a policy that stays the same.
You think you want to leave your dependents a similar amount of money regardless of when you pass on. In certain situations, while we typically caution against permanent life insurance, there are situations like having a special needs child where looking into whether permanent life insurance may make sense.
How Laddering Policies Works
Let's say you have:
Four very young children who will need support for the next two decades
A large mortgage
Not much saved in retirement yet
Right now, you may need $5 million in life insurance in order to take care of your family and set them up for financial security.
In 10 years though, with your salary, you anticipate that your mortgage will be paid off, you will have more in savings and 529s, and there will be one less decade of support for your children necessary.
In 20 years, you anticipate you will have much more in savings and much less in support necessary for your children, but would want to leave a small policy to cover any expenses at the time of your death without having to liquidate assets, as well as some residual support for your spouse.
In this case, it may make sense to buy:
A 10-year policy for $2 million
A 20-year policy for $2 million
A 30-year policy for $1 million
If you were to pass away next year, all three policies would pay out, leaving your family the $5 million they need.
If you were to pass away in 11 years after you paid off your mortgage and got through the expensive daycare and diaper years, you would have two policies leaving your family $3 million.
If you passed away in 25 years, your spouse would still have $1 million to cover expenses and ensure they are still on the path to financial independence.
Laddering these three policies is much cheaper than buying a $5 million dollar policy for 30 years.
How Much Can You Save With the Ladder Strategy
This depends on the factors that are used to calculate policy premiums, such as:
Amount of coverage
Use the example comparison below when you’re reviewing life insurance quotes to assess how much you can save with your quotes.
$1 million coverage policy for 30-year term: $950 annually
$500,000 policy for 10 years: $180 annually
$300,000 policy for 20 years: $205 annually
$200,000 policy for 30 years: $255 annually
By laddering the $1 million coverage over the different term policies, you annual premiums for this example would drop to:
Years 1-10: $640, saving $310 a year
Years 11-20: $460, saving $490 a year
Years 21-30: $255, saving $695 a year
As you can imagine, more coverage would cost a higher premium, potentially saving you even more by using the laddering system. Additionally, if you achieve financial independence earlier than anticipated, you can drop one of your policies without giving up all of your policies altogether, resulting in substantial savings while maintaining the coverage you need.
How Much Coverage Do I Need?
This depends on your situation now and how it will change over the next few decades. Visit our life insurance page for a discussion about this so you can build your personalized ladder. Then reach out to one of our partners above to shop quotes and get started.