Laddering Life Insurance Policies – Is it Useful? (in India 2021-22)

Have you heard of life insurance ladders? Or laddering of life insurance in India?

If yes, then great. If not, then this would be interesting for you.

You will agree that life insurance requirements are fairly dynamic and different for different people. When we begin earning, there aren’t many financial responsibilities. But when marriage + kids happen, things change and responsibilities increase. Consequently, so does the need for a higher life cover. So life insurance requirement change with age.

But it’s not that the insurance requirement only goes up as you age. It can come down too. When your kids have completed education and your home loan is over, you do not need to cover for them. In such cases, if you still have a policy large enough to cover those risks, it probably means you are paying premiums for the extra cover* that you don’t need. But let’s not get so judgmental so soon.

*Being over-insured is still fine. But don’t be underinsured! It can be catastrophic.

So what is this ladder method of insurance?

And is it something important?

Laddering of Life Insurance Policies (India 2021)

How to use the ladder method?

It works like this – you purchase separate life insurance policies with different tenors. Each policy is bought to cover a different risk. The tenor of the policy is ideally equal to the time left for the goal being covered. As the goal is achieved (and of course policyholder survives), the linked policy gets over too. This frees up premium (which can be invested elsewhere).

Let’s take a small example to make it more understandable.

Suppose you are 34 years old, married (to homemaker spouse), have one daughter (7 years old) and a home loan with Rs 20 lac outstanding (13-year remaining tenure).

Now the risks (if you die today) are:

  • Repaying Rs 20 lac home loan
  • Providing money for family’s regular expenses for several years
  • Money for daughter’s higher education when she turns 17 (~ Rs 30 lac)
  • Money for daughter’s marriage when she turns 25 (~ Rs 50 lac)

Let’s see how much insurance cover might be needed:

  • Rs 20 lac for home loan closure
  • Around Rs 1 crore for family’s regular expenses (roughly speaking)
  • Rs 30 lac for daughter’s higher education
  • Rs 50 lac for daughter’s marriage

So, the total cover required is 20 lac + 1 crore + 30 lac + 50 lac = Rs 2 crore.

This is much more than what many people believe is enough – Rs 50 lac or Rs 1 crore Life insurance.

Now you have two options:

  • Buy a single policy that covers everything (loan repayment, monthly expenses for family for decades, higher education for daughter and her marriage expenses) OR
  • Create a ladder of different policies

If you buy a single policy, it will give you a cover of Rs 2 crore.

But if you think about it, full Rs 2 crore cover is not required till the end. This is the exact time-wise requirement:

  • Rs 20 lac – for home loan closure – 17 years
  • Rs 1 crore – for family’s expenses – 30 years
  • Rs 30 lac – for daughter’s education – 10 years
  • Rs 50 lac for daughter’s marriage – 18 years

Taking one plan of Rs 2 crore for 30 years means you are taking extra cover which ideally you don’t need. (Please note that it’s still fine to be over-insured).

As mentioned, the other option is to buy separate term insurance policies with different tenors that correspond to each of these goals, i.e. laddering of insurance. Have a look at this diagram below:Laddering Life Insurance Policies

So to create a ladder, instead of one policy of Rs 2 crore, you buy four simple term policies:

  • Rs 20 lac for 13 years
  • Rs 30 lac for 10 years
  • Rs 50 lac for 18 years
  • Rs 1 crore for 30 years

Each pertains to a very specific goal. And as soon as the goal is achieved, the earmarked policy’s term also gets over.

So continuing the same example, if you die:

  • Between 34 and 44, the family gets Rs 2 crore (covering 4 risks)
  • Between 45 and 47, the family gets Rs 1.7 crore (covering 3 risks)
  • Between 48 and 52, the family gets Rs 1.5 crore (covering 2 risks)
  • Between 52 and 65, the family gets Rs 1.0 crore (covering 1 risk)

So in this case, if this person dies between 34 and 44, the full Rs 2 crore is available for the family. Now at the age of 45, the policy that was purchased for covering child’s education has finished. And rightly so. The goal of daughter’s higher education has begun (and money would have been arranged either through savings or loan). So now if this person was to die after 45 (and before 47), the family would get Rs 1.7 crore. And so on…

Now let’s compare the premiums.

I have taken premium quotes from a private insurer’s website for a 34-year old non-smoking healthy male:

Life Insurance Premium comparison

Now before you start making deductions that the sum of premiums for all 4 policies is more than one single bigger policy’s premium, do note a few things:

  • The total premium paid over the lifetime (assuming survival) is lower for the laddering approach.
  • But this may not always happen.
  • You would get different results for different scenarios (for different age, sum assured(s), policy terms, etc.)
  • This premium scenario is specifically for the example taken (34-year old with given set of goals that need to be covered for). The numbers might be different for other cases. It’s easily possible the sum of laddering approach premiums is lesser than one big policy.

I know what you are thinking.

Isn’t this an unnecessary complication? Is it not easier to purchase one big policy and be done with it?

The answer depends on each individual’s choice.

I prefer to keep things simple and would be ready to pay extra ‘unnecessary’ premium to be a little over-insured for slightly longer. 🙂 Someone else might not be willing to do it.

So for those who want to save money on premiums, the laddering insurance technique is an option. But do note that this approach might not work for everyone. Laddering strategy, its costs and its actual benefits vary from one case to another. Better to get professional advice to check whether it actually works for you or it’s an unnecessary complication.

But no doubt – at first laddering of insurance does seem very logical – each goal’s risk is being covered with a separate policy. And as the goal is achieved, you don’t need to continue the policy.

If you are young and want to uncomplicate your financial life, better to buy a bigger policy (you can even split it between insurance companies if you wish) than what you currently need. And make sure you don’t mix insurance and investment and simply buy a plain term life cover. It will be cheaper and help when responsibilities increase later on. And no matter what, just don’t be underinsured if you have dependents.

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