What Is Increasing Term Life Insurance?Everything you need to know about increasing term life insurance and whether it is the right option for you.
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The biggest benefit of increasing term life insurance policies, is that, over time, their payout increases.
These policies are ideal for those who know they need insurance now but also need to plan for increased coverage in the future.
In this article, we will discuss what increasing term life insurance is, how it works, its pros and cons and if it is the right option for you.
What Is An Increasing Term Life Insurance Policy?
Increasing term life insurance is a type of term insurance, where the death benefit gets larger over time, which can help offset inflation or protect your growing family.
This is, however, different from most term life policies, which are level, meaning your premiums are stable and the death benefit does not change over time.
What is Term Life Insurance?
Term life insurance policies last for a specific period, such as 10, 20, or 30 years. This type of life insurance is typically chosen by people who want to protect their loved ones in the event that they pass away unexpectedly.
If you die during this time, your beneficiary receives a death benefit from the life insurance company. If you die after the term, your term insurance policy will not pay out.
There are also permanent life insurance policies, which tend to have higher premiums and typically last a lifetime.
You may or may not have to pay more in premiums for your increasing term insurance as your death benefit grows.
Increasing term life policies are not as common in the United States as other types of term insurance, because they are riskier for the insurer.
The premiums for increasing term insurance also tend to cost more than level term policies because the payout might cost the insurance company more in the future.
Here are some important things to keep in mind about increasing term insurance plans.
How Do Increasing Term Policies Work?
If you buy an increasing term life policy, the insurer will offer you a sum assured. This is how much your death benefit will go up each year or for a set number of years.
The sum assured can be a flat-rate amount, like $10,000 every five years, or expressed in percentages, such as 5% annually.
If it goes up by a certain percentage, it's usually a simple percentage and not a compounded rate.
Example of How An Increasing Term Policy Works
If you purchase a policy worth $250,000 with a 5% increasing term, your policy death benefit will be worth $312,500 after five years.
Year 1: $262,500
Year 2: $275,000
Year 3: $287,500
Year 4: $300,000
Year 5: $312,500
Alternatively, you may purchase an increasing term life policy for 20 years. In the first five years, it offers $100,000, then $250,000 for years five to 10, then $500,000 for years 11 to 15, and finally tops out at $1 million during the last five years.
Some plans set a cap on the total death benefit of policies. However, even though the growth will stop at a certain amount, your policy will still be in place.
For example, let’s say you buy an increasing term life plan to cover your family over the next 15 years. The plan’s death benefit is capped at $215,000 and increases by 4% over 11 years.
In the first year, you’ll have $150,000 in coverage and after 11 years the policy will have reached its maximum limit ($215,000). From then on, your coverage won’t go up but you’ll still have coverage for four more years.
You may have to pay more for your policy every year because your coverage grows, but this is not definite. Before the insurance company issues your policy, they will go over this in more detail.
Pros and Cons of Increasing Term Life Insurance
An increasing term insurance policy offers some key advantages, including affordability and flexibility. However, it also comes with some potential drawbacks, such as the possibility of increasing premiums over time.
Pros of Increasing Term Life Insurance
As you get older, it might be a good idea to get more protection. This is where increasing term insurance comes in because it can help pay for things — like a bigger mortgage or supporting a bigger family. Other benefits of increasing term insurance include:
It is affordable: Similar to most term life policies, increasing term insurance is usually less expensive than a permanent policy.
It covers rising costs: As you age, life gets more and more expensive. In the future, you may need more coverage than you do now. If you plan to start a family or buy a bigger house, you might want to invest in increasing term insurance.
Protection against inflation: Due to inflation, the value of money goes down over time. Today, you could buy a 30-year term life insurance policy worth $100,000, but in the future, it might not be worth as much as you thought it would. An increasing term plan is one way to protect your coverage against inflation by increasing the death benefit over time.
There is no additional underwriting: Increasing term insurance lets you add more coverage in the future without having to reapply to the insurer or take a new medical exam.
It is tax saving: Along with the benefit of providing financial security to your loved ones, the increasing term insurance policy also provides the advantage of tax saving.
Cons of Increasing Term Life Insurance
Increasing term insurance policies also have some downsides that you should know about. Here are some of them:
Premiums are initially higher: You should prepare yourself that in the beginning, you will have to pay more money and get less coverage with an increasing term insurance policy.
Premiums can fluctuate: People who get an increasing term insurance policy may pay different premiums each month. So you won't pay the same amount each month.
Maximum limits prevent higher payouts: The death benefit will grow over time, but when it reaches the maximum limit set by the insurance company, it will stop.
Using Riders With Increasing Term Life Insurance
Some insurance companies offer riders, which are additional features that can be added to your policy for an extra fee.
With most life insurance plans, you can usually add a range of customized riders to your policy, such as:
Guaranteed insurability rider
Waiver of premium rider
Family income benefit rider
Accelerated death benefit rider
Long-term care rider
Riders are usually only available when your policy is first set up, so make sure to look into your options at the beginning.
Because of a disability or accelerated benefit rider in your life insurance policy, you can receive money while you're still alive, but ill or injured.
What are Accelerated and Disability Riders?
Accelerated benefit riders: It pays death benefits to life insurance policyholders while they are alive. Benefits are paid to policyholders with a chronic illness, terminal illness, or who need long-term care and meet certain conditions.
Disability rider: It is also referred to as a living benefit rider, and provides a steady, reliable source of income if the insured can no longer work and earn a living in the aftermath of a debilitating event.
Remember, any money you use through an accelerated benefit rider will be cut from the money your family gets when you die.
When your increasing term policy comes to an end, many insurance companies will let you switch to a permanent life insurance policy. This is known as a convertible term life insurance policy.
Make sure to ask your insurance company if they offer a conversion option before your term life policy runs out.
What are Other Available Riders?
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.
When Is Increasing Term Life Insurance The Right Option?
If you are young and your financial planning shows that you can expect your responsibilities to grow, an increasing term insurance plan might be ideal for you.
Also, an increasing term insurance plan is your best bet if you want a plan that pays out a benefit that grows with the rate of economic growth. So, think about what you need and, if possible, choose an increasing term insurance plan.
There are a few increasing term insurance plans available in the US. However, it's still very rare for most insurance companies to offer this kind of policy because it is quite risky for them as the death benefit increases.
FAQs About Increasing Term Life Insurance
Can You Have More Than One Term Life Insurance Policy?
Yes, a person can have several life insurance policies at the same time if their combined policy amounts don’t outnumber their financial obligations and assets.
Can I Increase My Existing Term Life Insurance?
Even though you can’t increase the amount of death benefit for a term policy, you can purchase a term conversion rider to convert the policy to a permanent life insurance policy or increase the term length.
What is the Difference Between Increasing and Decreasing Term Life Insurance?
An increasing life insurance policy is a type of term insurance policy that has a death benefit that increases over time. It isn’t commonly offered to people.
A decreasing term life insurance policy is often used to cover a specific debt, like a mortgage. For example, if you have a 30-year mortgage, you can buy a decreasing term insurance policy to match the coverage amount and length of the mortgage. Each year, the payout and mortgage amount would decrease together.
What Are Alternatives to An Increasing Term Policy?
Even though increasing term insurance is a great option, there are other options worth considering, such as:
Whole Life Insurance
Whole life is a form of permanent life insurance that lasts your whole life — as long as you pay the policy's premiums. It also accumulates cash value that you can withdraw or borrow against while you are alive.
Whole life provides many benefits compared to a term life policy, such as:
It is permanent
It has a cash value investment component
It provides more ways to protect your family's finances over the long term
Final Expense Insurance
Final expense is a type of whole life insurance with a smaller coverage amount and less strict criteria for qualifications.
Compared to other term and permanent life insurance, a final expense policy is an affordable way of getting life cover to pay for final expenses — such as outstanding debts, taxes, and burial costs.
These policies cost less than other types of life insurance and usually don’t require a medical exam, which makes them easier to get.
Some even offer a cash value component, which is a living benefit that policyholders can use.
Convertible Term Life Insurance
A convertible term life insurance policy lets its owner turn a term policy into a permanent policy without retaking a medical exam or submitting proof that you are healthy and eligible for insurance.
It helps people enjoy lower premiums for a longer time without worrying about insurance coverage later in life. Since it’s a flexible policy, you can choose when you want your coverage to continue.
Group Term Life Insurance
With group term life insurance, one term insurance policy is used to cover multiple people.
The most common type of group is a company, where the policy is given to the employer, who then gives the coverage to their employees as a benefit.
At no charge, many employers offer a basic level of group insurance, as well as the option to buy extra insurance for employees' spouses and children.
Where Can I Learn More about Different Life Insurance Policies?
An increasing term life insurance policy is best suitable for individuals who are young and expect their responsibilities to increase in the future.
However, before making an informed decision make sure that you compare the plans and choose the plan which best suits your requirements.
If you’re interested in learning about increasing term insurance, head to PolicyScout’s life insurance hub. We have loads of articles that will help you understand costs, enrollment options, different plans, and coverage.