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Increasing Term Insurance

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Increasing Term Insurance Plan

Increase denotes a constant rise in something. With time, your cost of living increases, your income increases, your financial needs increases and responsibilities increases too. When you think of providing a security net to your family, a term plan fits the best which provides a death benefit in case of an untimely death of an earning member. Increasing Term Insurance

Death cover or sum assured is a fixed amount under a pure term plan which stays constant throughout the term. A fixed death benefit may not be enough to fund the growing financial needs of your family or to confront the rising inflation down the line.

There is another category under Term Plans known as “INCREASING TERM PLAN.” Let us understand all about increasing term plans.

What is an Increasing Term Plan?

Increasing term plan is a type of a term plan which offers a percentage increase in your death cover every year by 5% or 10%. The death cover increases to a limit where it doubles the original death cover amount.

Main features of an Increasing Term Plan:

The following main features characterize increasing term plan:

The sum assured increases annually as per the pre-defined percentage under this type of term plan. Usually, the increment happens till the time the original sum assured doubles or increases up to a rate as mentioned in the policy terms and conditions.
The increasing term plan only offers a death benefit to the nominee if the life insured dies during the policy term. Death benefit could be further handed over as a lump sum or as income or combination of both as opted under a plan by the insured at the time of taking the policy. There are no maturity benefits under an increasing term plan.
The premium of an increasing term plan does not increase with an increase in sum assured annually. But, the insurance companies have fixed the premium appropriately in the beginning only in such a way that it covers the cost of offering “increase in sum assured” feature to the policyholder. The premium for the increasing term plan is priced higher as compared to a pure term plan or a decreasing term plan.
The premiums paid towards an increasing term insurance policy offers tax benefit under section 80 C up to Rs 1.5 L of the Income tax act. It also provides tax rebate under section 10 (10 D) which allows death benefit as a tax-free amount.

How an Increasing Term Plan works?

Let us understand the increasing term plan with the help of an example:

  • Life Insured: Rahul
  • Plan opted: Increasing Term Plan
  • Age: 30 years
  • Policy Term: 30 years
  • Original Sum Assured/ Death Cover: Rs10 Lakhs
  • Sum Assured Increase %: 5% (simple rate) per annum
  • Sum assured increase will happen till base sum assured doubles.

Rahul will pay the premium annually, and the sum assured increases from year 2 of the policy term.

The below table shows the sum assured increment during the policy year.

Policy Year Applicable Sum Assured (INR) Increment (INR) (5% simple rate p.a)
Year 1 10,00,000 50,000
Year 2 10,50,000 50,000
Year 3 11,00,000 50,000
Year 4 11,50,000 50,000
Year 5 12,00,000 50,000
Year 10 14,50,000 2,50,000 *(from 6th policy year to 10th policy year)
Year 15 15,00,000 2,50,000 *(from 11th policy year to 15th policy year)
Year 20 17,50,000 2,50,000 *(from 16th policy year to 20th policy year)
Year 25 onwards 20,00,000 2,50,000 *(from 21st policy year to 25th policy year) *Increase in sum assured stops as the sum assured has doubled.
Year 30 20,00,000 Policy maturity year

As per Rahul’s Increasing Term Plan, the death benefit would increase every policy year till it doubles the original sum assured.

Case 1: Rahul dies an untimely death, in the 15th policy year

The original sum assured is Rs 10 Lakh. But being an Increasing Term Plan, the sum assured has increased from Rs 10 Lakh to Rs 15 Lakh. The nominees will receive increased sum assured of Rs 15 Lakh.

Case 2: Rahul dies an untimely death in the 25th policy year

The death benefit payable to Rahul’s nominee will be 200% of the original sum assured due to increase sum assured feature. The sum assured payable at the time of death in the 25th year will be Rs 20 Lakh.

Case 3: Policy reaches the Maturity Stage

Rahul has been paying regular premiums through the policy span of 30 years and now the policy reaches the maturity stage. No maturity benefit is payable to Rahul as it is a term insurance policy which offers only death benefit.

Suitability of an Increasing Term Plan

Increasing Term Insurance Plan is suitable to combat the following aspects:

Inflation

Inflation is the rate at which the price of goods and services rise year on year basis. The current inflation rate is 4.96 % for the year 2018 till date and rose by 1.36% as compared to the year 2017. Term plan is all about providing a financial assurance to your family in your absence. Financial assurance should be substantial enough so that it could be able to maintain the similar standard of living for your family. With inflation rising year on year, the amount of death cover opted by you while taking a pure /level term policy may fall short to fund your family’s expenditures.

Thus, increasing term plan enables your death cover to rise year on year to mitigate the effects of inflation.

Life stage Events

There are various life stage events in your life like getting married, blessed with a child, birth of a second child, school/college admission of your kids, the marriage of your child, etc. Such changes increase the responsibility of the earning member of the family to be able to fund the life stage events.

The increasing term insurance plan will offer year on year increase to be able to have adequate amount as financial security for your dependents and to fund their own expenditures.

Enhance policy coverage through Riders

Riders are additional benefits which can be added to the increasing term plan by paying a nominal extra premium. Following riders or add-ons could be added to get a complete coverage against sudden accidental death, disability, and disease.

  • Accidental Death Benefit Rider: Covers death due to the accident and pays an extra amount in such scenario over and above the base policy sum assured.
  • Critical Illness Rider: This rider pays a fixed amount to the insured if he or she is diagnosed with listed critical illnesses under the policy.
  • Waiver of Premium: This rider waives off the premium due to illness or disability occurred to the insured person as mentioned in the policy contract.

There could be other riders which can be bought and are available on a plan to plan or company to company basis.

How can you buy an Increasing Term Plan?

Increasing term plan can be bought through an online or offline mode based on your feasibility and convenience.

1

Online -One can buy an increasing term plan online directly from the company’s website or a registered insurance web aggregator’s website.

2

Offline - Once can go to the insurance company’s branch, connect with an agent or a broker to buy an increasing term insurance plan.