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The Great-West Life Assurance Company, London Life Insurance Company and The Canada Life Assurance Company have become one company – The Canada Life Assurance Company. Discover the new Canada Life

The Great-West Life Assurance Company, London Life Insurance Company and The Canada Life Assurance Company have become one company – The Canada Life Assurance Company. Discover the new Canada Life

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What is a life insurance laddering strategy?

Key takeaways

  • “Laddering” your life insurance means buying multiple term life insurance policies with different term lengths expiry dates that match your expected financial needs as they change over time.
  • Instead of getting one big insurance policy that covers everything for a long time, you buy several shorter polices that last for different periods of your life like paying off your mortgage, paying for your kids’ education, or planning for retirement.
  • As each policy’s term length is ending, you reassess your financial situation and decide if you still need as much coverage.

What is life insurance laddering?

The life insurance ladder strategy involves purchasing several term life insurance policies with varying term lengths, anywhere from 5 to 50 years, to align with your evolving financial requirements over time.

Laddering can offer essential financial protection for your loved ones. By diversifying your coverage and spreading the risk across multiple policies, you mitigate the impact of your absence on your family’s financial stability.

Sometimes, it can be more advantageous to have many insurance policies instead of a single large policy that aims to align with the duration of your longest debt. Laddering life insurance allows you to adjust your coverage as your life circumstances evolve.

Are there any advantages to the ladder strategy?

Customization

Life insurance laddering allows you to tailor your coverage to fit your unique financial needs and life circumstances. Instead of relying on a single one-size-fits-all policy, you can mix and match different policies with varying coverage amounts and term lengths to help address your specific financial goals or obligations. 

For example, you may prioritize paying off your mortgage early in your career, so you purchase a policy with a term that aligns with your mortgage term. Later, as your children grow older and their education expenses become a priority, you can obtain additional coverage to ensure their education needs are met if you die.

Cost-effectiveness

By purchasing several shorter-term length policies instead of 1 large policy, you can often save money on premiums. This is because you’re only paying for the coverage you need at each stage of your life, and only for as long as you need it. 

For example, during your younger years when financial responsibilities may be higher, you might opt for more extensive coverage. As you pay off debts and accumulate savings over time, you can gradually decrease your coverage, reducing your overall insurance costs. As a further example, let’s look at how you could save money with the ladder strategy.  

Flexibility

Laddering adjusts to your changing financial responsibilities over time, ensuring you have adequate coverage when you need it most and reducing it as those needs diminish, such as when your children become financially independent. 

Secondly, laddering can lead to cost savings, as shorter-term policies are generally cheaper, and as you end them, you’re left only with the coverage you still require. This method also helps manage your budget more effectively by spreading out premium payments, making them more manageable compared to paying a large premium for one big policy. 

Additionally, laddering allows you to tailor coverage to specific financial goals, like paying off a mortgage, funding college education, or providing general family support. This targeted approach ensures you have the right coverage at the right time. Lastly, it offers the flexibility to cancel or reduce the amount of one or more policies if your financial situation improves or your needs change significantly, without losing all your coverage.

Risk management

One of the more significant benefits of life insurance laddering is its ability to possibly mitigate risk. By spreading your coverage across multiple policies with staggered term lengths, you could reduce the risk of being underinsured or overinsured at any given time, maximizing the protection for your loved ones.

Additionally, if your financial situation improves or certain liabilities reduce, you can gradually decrease coverage without jeopardizing your overall protection. This risk management approach could help you strike the right balance between adequate coverage and affordability throughout your life. 

Who may the laddering strategy be best suited for?

People with mortgage or debt

Laddering can be beneficial for people with significant financial obligations, such as a mortgage or other debts. By aligning policy terms with the repayment schedule of these debts, you ensure that your loved ones won’t be burdened with financial liabilities in the event of your death. 

For example, if you have a 30-year mortgage, you can purchase a 30-year term life insurance policy to cover the outstanding balance if you die during that time.

Professionals with steady income

Those with a stable job and consistent income can benefit from laddering by structuring their coverage to match their earning years. This ensures that your family is adequately protected during the period when they rely on your income the most. As your career progresses and your income potential increases, you can adjust your coverage accordingly to maintain adequate protection.

People with long-term goals (10-30 years)

By purchasing policies with staggered terms that coincide with long-term goals, such as funding their children’s education or achieving a comfortable retirement, can benefit from laddering. You can ensure that your long-term goals won’t be sidetracked, and financial resources are available in the event of your death. For instance, a 10-year policy might cover student debt obligations, a 20-year policy for cover your child’s future education costs, and a 30-year policy to manage a mortgage or retirement needs.  

Get a quote for flexible and affordable Canada Life My Term™ life insurance plans that help protect the ones you love.

Parents 

If you’re a parent, it’s important to think about your child’s well-being. Laddering allows you to tailor your coverage to support your children’s upbringing, education, and other needs as they grow. By strategically combining policies with varying coverage amounts and terms, you can ensure that your children are financially protected and can pursue their goals, if you die.

Those with dependents or family

Whether you’re married with children, in a common-law relationship, supporting aging parents, or caring for other dependents, laddering can offer essential financial protection for your loved ones. By diversifying your coverage and spreading the risk across multiple policies, you mitigate the impact of your absence on your family’s financial stability. This could ensure they can maintain their standard of living and meet their ongoing expenses without hardship.

Let’s look at an example of how diversifying your coverage can help your needs and goals. 

 Meet Julia, she’s 34 years old and in her first year as a full-time oncologist. Her current income is $240,000 and her student debt has accumulated to almost $250,000. Julia is in a common-law relationship. She has one child and is planning to have more children within the next few years. Together with her partner, she is renting an apartment for $3,000 a month.

Julia doesn’t have life insurance coverage. She’s concerned that if she dies unexpectedly, her young, growing family will be left with a large amount of debt and increased expenses over time.

Based on her financial situation and various coverage needs upon her death Julia’s advisor recommends a ladder term insurance strategy with a total coverage of $2,250,000 consisting of: 

  • Canada Life My Term™ for five years with a coverage of $250,000 to address her student loan debt. This translates to a monthly premium payment of $14.16. 
  • Canada Life My Term for 18 years with coverage of $250,000 to address her children’s education costs. The monthly premium for this piece is $16.99. 
  • Canada Life My Term for 26 years with a coverage of $1,725,000 to replace the loss of her income. This translates to a monthly premium payment of $105.55. 
  • A permanent life insurance coverage, using Canada Life universal life insurance with level cost type, for $25,000 at a monthly cost of $18.69.

The total monthly payments for all four options is $155.39.

This ladder insurance strategy provides Julia with a way to address her financial priorities and support her loved ones. 

Those who are single and planning 

Even if you’re single and don’t have immediate dependents, laddering can still be beneficial. You can use it to protect any co-signers on loans or other financial obligations, cover final expenses, or leave behind a financial legacy for loved ones or charitable causes.

Additionally, laddering allows you to plan for future life events, such as marriage or starting a family, by providing a solid foundation of financial security.

How is a life insurance ladder strategy constructed?

Determining your financial needs

Start by assessing your current financial obligations and future goals. Identify any outstanding debts, such as a mortgage, car loans, or credit card debt, that would need to be covered if you were to pass away. Additionally, consider anticipated expenses, such as funding your children’s education or replacing lost income for your family’s living expenses. Understanding these financial needs helps you determine the amount and duration of coverage required for each policy in your ladder.

Buying now and save in the future

Purchasing life insurance policies now can help you secure a lower issue age or premium payment. This is especially important for long-term financial planning, as the cost of living increases and insurance premiums get more expensive the older you are.  Your premiums won’t increase in the initial duration of your policy, but they could increase when your policy renews automatically or buy a new policy.

Matching policies to financial goals (Term-10, 20, and 30)

Tailor each policy in your ladder to correspond with specific financial needs or milestones to help loved ones in the event you pass away. For short-term obligations like paying off a car loan or credit card debt, opt for shorter-term policies, such as 5 to 10-year terms. For intermediate goals like having the money to pay for children’s college or university education, consider medium-term policies with 15 to 20-year terms. For long-term protection to replace lost income or support your family’s financial stability, choose longer-term policies, such as 30-year terms.

Get a quote for flexible and affordable Canada Life My Term™ life insurance plans that help protect the ones you love.

Gradual decline in premiums 

As insurance coverage amounts decrease and policies within your ladder are no longer needed, your premiums gradually decline over time. This can provide relief on your budget as you age, and your financial responsibilities diminish. By strategically structuring your ladder, you can ensure a smooth transition from higher premiums during your peak earning years to more manageable premiums into retirement.

Things to think about with a life insurance ladder strategy

Regularly review your financial goals

Life is dynamic, and your financial goals may evolve over time. It’s crucial to periodically reassess your objectives and ensure that your life insurance ladder remains aligned with your current needs and goals. Whether you’re concerned about paying for your children’s education, paying off debts, or planning for retirement, your life insurance coverage should adapt to accommodate these changes. The ladder strategy is a lot like managing your investments—it’s all about staying on top of things and adjusting as needed. 

Just like you’d regularly review your investment portfolio to make sure it’s still meeting your goals, it’s important to check in on your life insurance ladder. Your life can change with events like getting married or going through a divorce, and this can change your financial needs. For example, if you get married, you might need to add more coverage to protect your spouse. 

On the other hand, if you get divorced, you might need to adjust your coverage to remove your ex-partner as a beneficiary. By treating your life insurance like you would your investments, you can make sure it’s always working for you and your loved ones, no matter what life throws your way. It’s all about staying proactive and making sure your financial plan stays in line with your changing circumstances.

Understand underwriting and premiums

Underwriting is the process by which insurance companies assess your risk profile to determine the cost of your premiums. Factors such as age, health status, lifestyle habits, and occupation can all influence your premiums. It’s essential to understand how underwriting works and how certain factors may impact your insurability and the cost of coverage. 

Stay informed about policy options and benefits

Life insurance policies can vary widely in terms of features, benefits, and conversion options. Stay informed about the specifics of each policy within your ladder, including any conversion privileges that may allow you to convert term coverage to permanent insurance without undergoing additional underwriting. Understanding the options available to you ensures that you can make informed decisions about your coverage as your needs change over time.

What’s next?

Now that you’ve learned about what a life insurance ladder strategy is, you may want to: 

  • Speak with an advisor about how a term life insurance ladder strategy could benefit your financial needs, goals, and protect your loved ones.
  • If you think term life insurance coverage may be a fit for your needs, get a quote to see how much term coverage you could get through Canada Life.

The information provided is accurate to the best of our knowledge as of the date of publication, but rules and interpretations may change. This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.

Term rates quoted in this article are based on the rates in effect as of May, 2024 and are subject to change.