We all know that when buying a term insurance plan we should choose an optimal level of sum assured based on our requirements. The optimal level of sum assured should be determined based on our income-expenses schedule, the assets we have, the liabilities we owe, and the financial goals we have in our life. But, does our financial situation stay the same?
Our financial situation is dynamic. It changes with our life stages and age. Moreover, even the rate of inflation necessitates a higher coverage level in later years of life. As such, estimating the correct amount of sum assured needed for a term life insurance plan might prove difficult. What if you need a higher cover later on in life?
What is Increasing Term Insurance Plan?
As the name suggests, an increasing term insurance plan is a term insurance plan wherein the sum assured chosen on plan commencement increases every year by a specified amount. It is just opposite to the decreasing term insurance plan.
The premium rate might or might not remain the same throughout the plan tenure. However, the coverage allowed under the plan depends on the health of the insured at the time of buying the policy.
Increasing term insurance is typically designed to keep inflation and other changing circumstances in life in mind.
While this is the simplest and the most basic definitions of an increasing term insurance plan, the plan has many features, which include the following:
The sum assured, as stated earlier, increases every year. Some plans have a limit to the maximum increment in the sum assured and the increment stops after the maximum limit is reached even though the plan tenure continues. The rate of increase of sum assured might be expressed as a percentage or an absolute amount. In both cases, the rate of increase is mentioned beforehand and stays the same throughout the plan tenure. If the sum assured increases by a percentage, the increase could be at a simple rate or a compounded rate though a simple rate is usually the norm.
Even though the coverage increases every year, premiums under the plan usually remain constant throughout the plan tenure. The company accounts for the increase in the sum assured while calculating the premiums beforehand and so premiums are uniform. Usually, premiums paid in the initial years are higher than required to compensate for the lower premiums when the sum assured increases over time. Moreover, the premiums of an increasing term insurance plan are higher than premiums charged by a normal level term insurance plan or a decreasing term insurance plan.
Like normal term life insurance plans, increasing term plans also pay only a death benefit. The amount of death benefit is the sum assured applicable (after increase) at the start of the policy year in which the life insured died. While most increasing term insurance plans pay a lump sum benefit on death, there are some plans, which have been recently launched which have a monthly or annual income payout. These plans pay the death benefit partly in a lump sum and partly in monthly or annual incomes or completely in monthly or annual incomes for a specified tenure after the death of the insured.
Riders are additional coverage features that, when opted, increase the scope of coverage. Riders can be taken by paying a minimal additional premium. Some popular riders available in most increasing term plans include
Accidental death and disability benefit rider This rider pays an additional sum assured in case of accidental death or disability suffered during the plan tenure.
Critical Illness Rider This rider pays an additional sum assured if the life insured suffers from any of the listed critical illnesses covered by the rider during the plan tenure.
Waiver of premium rider this rider waives the future premiums while the plan continues if the life insured faces accidental death or disability.