As you reach major milestones in life, the amount of life insurance you need, and how much it costs, is going to change. We all become more expensive to insure as we age, so applying for a new policy later in life usually means paying more money for less coverage. At the same time, paying off a mortgage and settling other debts and financial obligations often means you don’t need as much coverage. By stacking multiple life insurance policies with different coverage amounts and term lengths, you only pay premiums for the coverage you need at different stages of life.
The term life insurance “layering” strategy involves multiple smaller policies of varying lengths that reduce the amount of insurance over time as your needs diminish. Whereas, generally you would probably just have a single large policy. “Layering” life insurance policies lets you strategically decrease your coverage over time, ensuring you only pay for the coverage you need as your circumstances change. In addition, you can provide your loved ones with the right financial safety net while locking in the most competitive rates. If implemented properly, you can save thousands of dollars in premiums.
Life insurance policies are priced according to several variables:
● how long the policy lasts - a 20-year term policy costs more than a 10-year term policy,
● how much coverage is provided - a policy with a $750,000 coverage amount costs more than one with a $500,000 coverage amount, and
● your background - a person with a complicated health history will have a more expensive policy than someone without any health conditions, which is why younger applicants pay less.
Layering your life insurance policies takes advantage of the first two variables by decreasing certain coverages when they are no longer needed. It also takes advantage of the third variable by locking in lower rates for each policy when you are young and healthy.
Here’s one scenario where layering life insurance might make sense. Let’s say you are 35, and you have 2 children, ages 4 and 6 who represent an insurable need for the next 20 years. You want to provide for your children’s college education in the event you pass away prematurely. You also want to cover your existing mortgage balance that has 20 years remaining balance on it. In addition you would like coverage to replace your income if you were to pass away. Instead of purchasing one 30-year policy, you could layer a couple of policies with different durations.
To cover your children and the balance of your mortgage, you would need a 20-year policy to cover the 20 years when you are most vulnerable. Should you pass away prematurely, this policy will pay off your mortgage and provide for the 20 years when your children are most dependent on you. In addition to the 20-year policy, you could “layer on” a 30-year policy to provide an additional 10 years of coverage to replace your income until your retirement at age 65. Layering your coverage as opposed to buying one long-term policy would save you a significant amount of money.
If you are looking to save money on life insurance, layering your policies could save you thousands over the life of your coverage. Layering your coverage could be a worthwhile strategy.