About Increasing Term Insurance

An increasing term insurance plan, as the name implies, is a term insurance plan where the sum assured, decided at plan inception, rises by a specified amount each year. It’s the polar opposite of a declining term insurance policy.

The sum assured is designed to grow by a predetermined amount each year, considering inflation and your increasing financial needs. Increasing term plans are ideal for achieving financial goals for you and your family at various life stages. For example, the increasing coverage can help align with significant life events such as marriage or the birth of a child.

The initial amount of coverage provided by the plan is determined by the health of the insured at the time of purchase.

How Does Increasing Term Insurance Work?

To understand how it works, let's consider Devesh's example. Devesh, a 30-year-old, purchases an increasing term insurance plan with a Rs. 30 lakh sum assured. He aims to achieve his financial goals while ensuring his loved ones are financially secure in the future. He has calculated his annual premium using an online term plan premium calculator.

In this plan, the sum assured increases by 5% annually. If he purchases a term insurance plan on February 20, 2019, his sum assured on the next policy anniversary (February 20, 2020) will be Rs. 31.5 lakhs, continuing to rise until the end of the policy period.

What Are the Features of Increasing Term Insurance?

• Annual Increase in Coverage: The sum assured grows each year. Some plans cap the maximum increase in the sum assured, stopping the increment once the cap is reached, even if the policy is active. The rate of increase can be a percentage or an absolute number. In both cases, the rate is specified in advance and remains constant throughout the plan's duration. If the sum assured grows by a percentage, it can be at a simple or compounded rate, with the former being more common.
• Flexibility in Death Benefit Payout: Like traditional term life insurance plans, increasing term life insurance policies primarily pay a death benefit. The death benefit is the sum assured applicable (after any increases) at the start of the policy year in which the life insured dies. While most increasing term insurance plans offer a lump sum death benefit, some newer plans provide a monthly or annual income. These plans may pay the death benefit as a lump sum, monthly/annual payments, or a combination of both for a defined period after the insured's death.
• Riders for Enhanced Coverage: Riders are optional add-ons that expand coverage. They can be added by paying a small additional fee. Most increasing term plans offer popular riders such as:
  • Accidental Death and Disability Benefit Rider: Pays an additional sum assured in the event of accidental death or disability during the plan's term.
  • Critical Illness Rider: Pays an additional sum assured if the insured suffers from any critical illnesses listed in the rider during the plan's term.
  • Waiver of Premium Rider: This rider waives future premiums if the life insured dies in an accident or becomes disabled during the policy term.
• Comparable Premiums: Despite annual coverage increases, premiums for these plans typically remain constant throughout the policy term. Insurers account for the projected growth in the sum assured when calculating premiums, ensuring consistency. Premiums in the early years are often higher to offset the increasing sum assured later. Additionally, premiums for increasing term insurance plans are generally higher than those for standard level or declining term insurance plans.

Why Should I Opt for Increasing Term Insurance?

Investing in an Increasing Term Insurance Plan offers several advantages:

• Effective Anti-Inflation Strategy: As inflation erodes purchasing power over time, the increasing sum assured helps maintain adequate coverage. This ensures your family remains adequately protected, even if you're not around. The increasing sum assured helps cover additional expenses that arise due to inflation over the years.
• Aligned with Life Goals: The rising life cover naturally aligns with your evolving life goals and responsibilities.
• Affordability: While premiums are generally higher than level term plans, they typically remain constant throughout the policy term, offering budget predictability.
• Tax Benefits: Like other term insurance plans, increasing term life plans offer tax benefits. Premiums paid are eligible for deduction under Section 80C of the Income Tax Act, 1961. Additionally, the death benefit received by your beneficiaries is tax-free. These tax advantages help policyholders save money in the long run.

Increasing Term Insurance Versus Other Types of Term Insurance Policies

Who Should Ideally Buy Increasing Term Insurance?

Increasing term insurance plans are particularly beneficial for young investors. As coverage grows with time, it aligns with increasing future responsibilities. It is also an excellent choice for those seeking protection against economic inflation.

Whether you've recently started working or are self-employed, this plan provides appropriate coverage to meet escalating financial demands as your obligations and liabilities grow. However, comparing different term insurance policies is crucial before making a purchase decision.

Conclusion

Increasing term insurance is suitable for young individuals anticipating growing responsibilities. Therefore, always compare plans to choose the one that best suits your needs.