Most adults with families have a need for life insurance, and the product of choice is usually a term policy. The most common time periods for term policies are a 20 or 30 year term. But is that really the best way to go?
What is life insurance layering?
Layering your life insurance involves getting multiple term policies to cover different time periods. The thought behind it is that you won’t need the same amount of death benefit for a 20 or 30 year time period, but will need less insurance as you get older. Layering your insurance could mean having 3-4 different policies with terms of 10, 15, 20, or 30 years. Layering will provide the most coverage in the first 10-15 years, and less coverage as you get older because some of your policies will have expired by then.
Why layer your life insurance?
I have found a few characteristics of families where layering life insurance works really well. If you are a relatively high income earner, aggressively saving, and don’t let your lifestyle get away from you, then layering your life insurance can be a great fit.
Two important things happen with families that meet the criteria above:
- They pay down their debt
- Their savings increase rapidly
High debt and low savings are two of the biggest reasons to get life insurance, so the more savings you have and the less debt, the smaller the need for life insurance. If you are not sure whether you need coverage at all, start with the problem with having no life insurance.
Layering example: 30-year term vs. three layered policies
Let’s look at an example of a 32 year old male needing $1,500,000 of life insurance due to being the family’s sole wage earner, having three young children, and having high student loan debt. The premiums below are quotes from when this article was first written in 2017 and are for illustration only; your own quotes will depend on your age, health and the insurer.
The first line of the table shows us that a 30 year term policy for the full $1,500,000 will cost the family $2,254 a year, or $67,620 over 30 years. The layered approach uses three $500,000 policies with 10, 20 and 30 year terms. The family pays all three premiums ($1,642 a year) for the first ten years, two premiums ($1,298 a year) for the next ten, and only the 30 year premium ($824 a year) for the last ten. That adds up to $37,640 over the same 30 year period. Layering life insurance gives the family a lower initial cost of $1,642 a year instead of $2,254, and saves $29,980 over the 30 year time period.
This 32 year old expects to have his student loan debt paid off in ten years. He also expects to have over $500,000 of savings at the end of the ten year time period. If he commits to his plan of paying off debt and aggressively contributing to savings, then he won’t need as much insurance in ten years.
Is layering the right fit for you?
It can be, but it depends on your situation. You need answers to questions like:
- How old are your kids?
- Do you plan to have (more) kids?
- How much debt do you have?
- How much will you be saving?
- Does your spouse work, or plan to work?
- Are you going to pay for your kids’ college? (See options for college savings accounts.)
- Are you disciplined enough to not let lifestyle creep get the better of you?
These questions will help you determine if you should layer your life insurance, and what terms to use. Most life insurance companies offer terms of 10, 15, 20, and 30 years.
How does layering work with FEGLI?
Federal employees can use the same idea with their group coverage. FEGLI can be one of your layers while you are working, but its cost rises as you age, so private term policies often do the heavy lifting for the years you need the most coverage. My guide to FEGLI in retirement covers what happens to that coverage after you leave federal service.
Layering your life insurance is only one thing we look at in our financial planning process. It can be one of many ways to reduce your expenses, therefore giving you more money to invest. If you have questions and would like to schedule a call to discuss your situation, you can do so here.
Brad Bobb, CFP®, Bobb Financial, is an expert in federal benefits and retirement planning for federal employees.
This article is for educational purposes only and is not individualized financial advice. Figures are illustrative.