Why It Makes Sense for Life Insurance Coverage to Decrease Over Time

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Key Takeaways:

  • Life insurance provides peace of mind for your loved ones after you’re gone.
  • Most life insurance companies sell you a prepackaged policy. The same coverage that works for your neighbor, your uncle, or your friends might not be the best fit for you.
  • When you stack life insurance policies together, you get more flexibility to match your coverage to your financial needs as your life insurance decreases over time.

Life insurance should never be one-size-fits-all. Your best option for life insurance is when you can customize your death benefit to match your needs. That’s why personal finance experts have long recommended “policy stacking.”

With policy stacking, your life insurance policy is “stacked” to provide the highest payout when you need it most. As time goes on and your financial goals change, your coverage changes with you. 

With a term policy that’s built to your needs, you can discover how we save you money over the long run, which leaves more cash for other priorities — like building a family financial wellness plan.

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What Does Policy Stacking Mean for Life Insurance?

Life insurance offers financial support for your loved ones after you’re gone. We introduce the next level of life insurance called “policy stacking” or “term laddering.” 

Consider this advice from an article in The New York Times:

“You can start by asking or finding the answers to two questions:

1. What amount of insurance would I need to replace the economic loss?

2. How long do I need that protection?

Keep in mind that the amount of insurance you need may change over time. For most people, it seems to decline over time, as obligations to family change and the value of your investments hopefully grow. At some point, it is a reasonable goal to be at the point where you are secure enough financially that you no longer need life insurance.”

Although stacking your policies will decrease your death benefit as you age, this is not decreasing term life insurance.

Decreasing term life insurance continues to charge the same monthly premium even though your coverage goes down. It’s also over-simplified and more expensive because it isn’t fully underwritten.

Instead, term laddering stacks a few smaller policies that step down over time — as your life insurance decreases over time, so do your premiums.

Related: Average Cost of Life Insurance by Age

How Term Laddering Works

When you ladder term policies, you get increased flexibility to change your policy to match your financial needs.

You might use this type of life insurance to cover:

  • Mortgage loans
  • Auto loans
  • Personal and business loans
  • Childcare costs
  • Education and tuition expenses

As time goes on, your mortgage balance may go down, and you may need less money for childcare and other obligations.

Your policy coverage might begin at $500,000. Just as your debts and other financial responsibilities go down as you age, your life insurance policy should be reduced over time, as well.

Think about it: A $500,000 life insurance policy might make sense when you’re in your 20s and 30s and have significant financial responsibilities. By the time you get to your 40s and 50s, you’ll have fewer financial obligations and won’t need as big of a policy. 

In a situation like this, dropping to $400,000 after 10 years and then eventually to $250,000 can give you peace of mind while saving you money on premiums.

Advantages of Policy Stacking

The biggest advantage of life insurance decreasing over time by stacking life insurance policies is the flexibility it offers for you and your finances.

  • Lower cost: Save money by not paying for more coverage than you need.
  • Peace of mind: You can customize your death benefit to match your financial needs.
  • Retirement friendly: Because the premiums go down over time, the price can better fit your budget when you retire.
  • Cover temporary needs: You get more financial security when you need it most, such as if you have a mortgage or are starting a family. 

Should You Ladder Your Term Life Insurance?

If someone depends on your income for support, you need a life insurance policy. Term laddering makes sense for most people.

It’s an excellent option to provide for your family if the worst should happen.

If you had a significant life change, such as starting a family, buying a home, or taking a new job, policy stacking can provide the financial protection you need while keeping your costs down.

To find out how much you can save with a custom-built term life insurance plan, use The Ultimate Life Insurance Calculator and get a free quote today!

Disclaimer: The comments, opinions, and analyses expressed at Everyday Life are for informational purposes only and should not be considered individual investment, legal or tax advice.

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