Laddering

What Does Laddering Mean?

Laddering is an investment technique in which different investments are made with the goal of having them mature at different times, allowing gains to be spread out rather than occurring all at once.

In the context of insurance, many individuals use laddering with life insurance. In this approach, they purchase multiple policies that provide coverage for specific periods. This strategy helps to spread out the coverage and extend it based on the policyholder’s evolving needs.

Insuranceopedia Explains Laddering

Laddering is commonly used in life insurance because the need for coverage is often greater when the insured has young children, who rely financially on the parent. As children grow older and become more independent, this need for coverage may diminish. Instead of purchasing a single, high-premium life insurance policy with 18 years of coverage, a parent might buy two policies: one that provides a larger amount of coverage for 15 years and another with a smaller amount of coverage for 25 years. This structure ensures more substantial coverage during the children’s early years and reduced coverage as they grow older.

Each policy in the ladder is typically a term life insurance policy, since term coverage is sold in fixed lengths and is cheaper than permanent coverage for the same death benefit. The exact mix of terms and coverage amounts will depend on the policyholder’s budget and obligations, which are shaped by factors like age, health, and the size of each policy.