Build a three-policy term ladder with your own numbers

A term ladder is three term policies of different lengths held at the same time, so your total coverage steps down as your obligations end. Building one takes about an hour with a pencil. This worksheet gives you the steps, a full worked example with every number shown, and a set of checks that catch the usual errors before you apply.

The guide on laddering term life policies to match your needs explains why and when a ladder makes sense. This post is the hands-on companion: you fill in your own figures and finish with three rungs, each with an amount and a length. All prices below are invented illustrations that show how the arithmetic behaves. They are not quotes, and real prices depend on your age, health, sex and the insurer.

What you need before you start

Gather the following. Rough numbers are fine for a first pass.

• Your mortgage balance and the year it will be paid off.
• Your children's ages and when you want their schooling covered.
• Your annual income and how long your household would need it replaced.
• Your savings and investments, and whether they are earmarked for something else.
• Any life insurance you already own, and when it ends. Coverage through an employer generally ends when the job does, so treat it as a bonus and not a foundation.

The tool at term life ladder builder can check your work at the end. Do the worksheet by hand first so you understand why it gives the answer it does.

The worksheet, step by step

Four steps take you from a list of obligations to three sized rungs.

Step 1: list the obligations with an amount and an end year

Write one line for each obligation. The amount is how many dollars the family would need on day one if you died, and the end year is the year after which that obligation no longer exists.

If you have used the The DIME method for sizing life insurance or another needs analysis, those results go in this table. The worksheet does not choose the amounts for you; it arranges them by date.

Step 2: turn the list into a staircase

Sort the end years from earliest to latest. Each time an obligation ends, the total you need falls. Write the total that applies between each pair of end years.

The rule is simple: the need in any period is the sum of the amounts of every obligation still running in that period.

Step 3: subtract the assets that will be there

Subtract savings and investments the family could actually use. Two cautions:

• Count only what you would really spend. Retirement accounts you do not intend to touch for decades should not offset a need that arrives next year, and money already earmarked for another goal cannot be spent twice.
• Leave out work coverage. Group life that ends when your employment ends cannot protect the late years of a 25-year plan. See is my life insurance through work enough? for a way to estimate how much of your coverage depends on your job.

Step 4: assign rungs from the bottom up

Pick three lengths from the terms available, commonly 10, 15, 20, 25 and 30 years. Use the end years from your staircase to choose them, rounding each one up.

Then size the rungs from the longest to the shortest:

1. The longest rung equals the smallest need on the staircase, the amount still required in the final period.
2. The middle rung equals the need in the middle period minus the longest rung.
3. The shortest rung equals the biggest need minus the other two.

Each rung is a separate level term insurance policy with its own face amount, premium and conversion privilege. Together they add up to the staircase.

A worked example, with every number shown

Say Sam, 38, is the main earner in a household with a spouse and a 4-year-old child. Everything here is hypothetical.

Step 1: the obligations.

Step 2: the staircase.

Step 3: assets. The family has $150,000 in savings that they would use and no coverage that outlasts Sam's job. Subtracting $150,000 from each step:

Step 4: the rungs. The staircase ends in year 28, so the longest rung rounds up to 30 years. The middle step ends in year 25, so the middle rung is 25 years. The first step ends in year 18, which rounds up to 20 years.

• Longest rung (30 years): $100,000, the final need.
• Middle rung (25 years): $400,000 - $100,000 = $300,000.
• Shortest rung (20 years): $920,000 - $300,000 - $100,000 = $520,000.

Step 5: check the sum in each band.

The surplus in years 19 and 20 and years 29 and 30 comes from rounding term lengths up to the next available length. That is the cost of working with standard terms, and it is a margin that helps if your plans run late.

Step 5: price the ladder with illustrative rates

Real prices come from quotes. To see how the arithmetic works, assume these made-up monthly premiums per $100,000 for a 38-year-old: $7 for a 20-year term, $9 for 25 years and $12 for 30 years. Longer terms cost more per dollar because they include more years of higher risk.

Total premiums over the life of each rung:

• 20-year: $36.40 × 240 months = $8,736
• 25-year: $27.00 × 300 months = $8,100
• 30-year: $12.00 × 360 months = $4,320
• Ladder total: $8,736 + $8,100 + $4,320 = $21,156

Compared with one long policy

The alternative is one $920,000 policy for 30 years, which would cost 9.2 × $12 = $110.40 a month, or $110.40 × 360 = $39,744 in total. The ladder is cheaper by $39,744 - $21,156 = $18,588 in this illustration.

That comparison is not perfectly fair. The single policy also gives Sam $920,000 of coverage in years 21 to 30, when the ladder gives $400,000 and then $100,000. If the family truly needs the larger amount that late, the single policy is the right choice. The saving exists because the ladder pays only for coverage the plan calls for. The post on one 30-year term policy or a ladder of three: cost and risk compared compares the two approaches in more depth.

Step 6: run these checks before you apply

A ladder that looks right on paper can still fail. Test it against these questions.

1. Does every year have enough coverage? Run your eye down the check table. The coverage column should be at least the need column in every band.
2. Does the longest rung reach your last obligation, with margin? In the example, the retirement shortfall ends in year 28 and the longest rung runs 30 years.
3. Are the amounts above each insurer's minimum? Insurers set minimum face amounts, often $100,000 or more. A rung smaller than the minimum may not be available.
4. Are there policy fees? Some insurers add an annual fee per policy. Three small policies may cost more than the arithmetic above suggests.
5. What happens if needs do not fall on schedule? A second child, a refinanced mortgage or a business loan can push an end year later. Add a margin to the final rung, or plan to revisit the worksheet when your family changes.
6. Is inflation accounted for? A $100,000 rung in year 29 buys less than $100,000 today. Consider rounding the final rung up.
7. Do the conversion deadlines make sense? Each policy has its own right to convert to permanent coverage, and shorter rungs may have shorter windows. See how long a term should you buy: 10, 20 or 30 years for how term length and conversion windows interact.
8. Will all three be underwritten together? Applying for all rungs at once locks in the same age and health class on each. Applying a year apart can price the later ones differently.

Second pass: change one input and rerun it

The value of a worksheet is that you can change a number and see what moves. Take Sam's example and change a single input: suppose the household refinances in year 6 into a new 30-year mortgage, so the mortgage obligation now ends in year 30 instead of year 25. Nothing else changes. The new staircase, after subtracting the same $150,000 in assets, is:

The middle step now runs to year 28, which rounds up to a 30-year term, the same length as the final step. The three-rung ladder collapses to two rungs:

• 30-year rung: $400,000, because the need stays at or above $400,000 until year 28, and the 29-to-30 step ($150,000) is smaller than that.
• 20-year rung: $920,000 - $400,000 = $520,000.

Using the same illustrative rates, the 20-year rung costs 5.2 × $7 = $36.40 a month and the 30-year rung costs 4 × $12 = $48.00 a month, so the pair costs $84.40 a month. Total premiums are $36.40 × 240 = $8,736 plus $48.00 × 360 = $17,280, which is $26,016, compared with $21,156 for the original three rungs. The refinance cost the household $4,860 more in premiums in this illustration, simply by moving one date. It is a useful reminder that a ladder is a plan tied to a schedule, and when the schedule moves, the ladder should be re-checked.

Notice, too, what the rerun shows about rungs: the number of rungs follows your data. Two rungs is not a failure, and four is not an upgrade. The laddering term life policies to match your needs guide notes that two rungs is often enough.

Questions to bring to a quote or an agent

Once you have rungs, the next step is quotes. Prices vary a great deal between insurers and between health classes, so collect several. These questions keep the comparison fair:

• Are the quotes for the same health class and the same amounts? A preferred-class quote for one rung and a standard-class quote for another make the ladder look cheaper or dearer than it is.
• Is there a policy fee, and is it included? Ask for the all-in monthly and annual premium for each rung.
• Can the three policies be applied for together? Some insurers will underwrite once and issue several policies; others treat each as separate.
• What are the conversion terms on each rung? Ask for the last conversion date of every policy, not only the longest one.
• What happens if I want to shrink or cancel one rung later? Ask whether you can reduce a face amount, and whether that changes the premium proportionally.

A fee-only planner can review the whole ladder for a flat fee and has no commission on which policies you pick. An agent paid by commission can still be useful for shopping across companies; just ask how they are paid and compare more than one set of quotes.

After you choose: the paper trail

A ladder multiplies paperwork, and the paperwork is where ladders fail in practice. When the policies are issued:

1. Make one sheet listing each policy: company, policy number, face amount, end date, conversion deadline and premium due date.
2. Name beneficiaries on every policy, and make sure the designations match unless you mean them to differ.
3. Set a calendar reminder a year before each rung ends, so you can decide whether to let it go, convert part of it or buy something new.
4. Tell your beneficiary where the sheet is. A family that finds one of three policies has collected a third of what was there.

When a ladder is not the right answer

A ladder suits households whose needs fall in steps and whose members will manage several policies. It is a poor fit if:

• Your needs do not fall, as with lifelong support for a dependent adult.
• Your total coverage is small enough that minimum face amounts and fees erase the savings.
• You would rather have one bill and one beneficiary form, and are willing to pay for simplicity.

For a household where one parent raises children alone, the dates are driven by each child's age; the post on a single parent's term ladder, matched to each child's age works through that case. For the narrower question of which end date to choose around college, see choosing a term length around your child's college date.

Your blank copy

Use these lines, and ask a licensed agent or a fee-only planner to review the result if the amounts are large:

1. Total obligations by band: ____ (years 1 to ____), ____ (years ____ to ____), ____ (years ____ to ____).
2. Assets I can count: ____.
3. Need after assets for each band: ____, ____, ____.
4. Longest rung: ____ for ____ years. Middle rung: ____ for ____ years. Shortest rung: ____ for ____ years.
5. Illustrative monthly cost, using quotes: ____.
6. Checks 1 to 8 completed: ____.

Key takeaways

• A ladder matches coverage to obligations by date: sum what is running in each period, subtract usable assets, then size rungs from the longest to the shortest.
• Round each rung's length up to an available term. The surplus created is a margin, not a mistake.
• Leave job-based group coverage out of the late years, because it ends with the job.
• A ladder is cheaper only because it covers less in the later years. Be sure that is what your family needs.
• Check minimum face amounts, per-policy fees and each rung's conversion deadline before you apply.