Increasing Term Insurance Plan
An increasing term insurance policy is a term plan wherein the sum assured increases annually. This increase is either allowed as a percentage of the original sum assured or as a fixed amount. The increase may be allowed up to a specified maximum limit, depending upon the insurer and might continue during the policy tenure or up to the term up to which the sum assured increases to the maximum limit.
If the assured dies during the policy tenure, the sum assured available in the year of death is paid to the nominee. However, increasing term plans usually don’t pay any maturity benefit.
How does an Increasing Term Plan Work?
Let’s understand how the increasing term plan works with the help of an example. Please note, this is just an illustration, actual amounts may vary depending upon the plan chosen and the terms and conditions mentioned therein.
Mr. Sharma buys an increasing term plan with a sum assured of Rs.25 lakhs. The plan allows an increase of 5% of the original sum assured (at policy inception) every year. The maximum increase is 100% of the sum assured. The plan is taken for a period of 25 years.
In this case, the sum assured would increase by Rs.1.25 lakhs every year. The increase would continue till 20 years after which the sum assured Will not increase beyond the 100% sum assured limit. Since a maximum increase of 100% of the sum assured is allowed, no further increase would be allowed from the 21st policy year.
Here’s how the plan would work in different instances –
Case 1 – The plan matures
No benefit would be paid on maturity. The policy would simply terminate
Case 2 – Mr Sharma dies in the 1st policy year
In the first policy year, the sum assured would remain at Rs.25 lakhs. The increase starts in the second policy year. Thus, the nominee would get Rs.25 lakhs in the claim and the coverage would be terminated.
Case 3 – Mr Sharma dies in the 7th policy year
The sum assured in the seventh year would be Rs.25 lakhs + Rs. 7.5 lakhs in an increased amount. Thus, a benefit of Rs. 32.50 lakhs would be paid and the plan would be terminated.
Case 4 – Mr Sharma dies in the 22nd policy year
The sum assured of Rs. 50 lakhs Rs.25 lakhs original + Rs.25 lakhs of increase in the first 20 years) would be paid to the nominee and the plan would be terminated.
Important Aspects Of The Increasing Term Plan
Here’s a look at some of the important aspects of the increasing term plan –
● Premium
The premium of an increasing term plan remains constant over the policy tenure. Though the sum assured increases every year, the premium doesn’t.
● Coverage
Increasing term insurance policies allow comprehensive coverage. As the coverage level increases, you can enjoy higher protection in the later years of your life when your financial responsibilities might increase.
● Riders
Increasing term insurance policies also allow multiple riders to choose from. These riders are available at additional nominal premiums and help you enhance the coverage of the policy. Some of the popular riders that are available includes the following –
Rider | Meaning |
Accidental deaths are covered under the rider. In the case of accidental death, the sum assured offered by the rider is paid | |
The critical illness rider covers a list of specified critical illnesses. If the life insured is diagnosed with any of the covered illnesses during the policy tenure, a lump sum rider sum assured is paid | |
This rider covers accidental disablements. In the case of a qualified disability, future premiums are waived off. The plan continues undisturbed and the insurer pays the premium on your behalf |
Reasons to Consider Increasing Term Insurance Plan
Some of the reasons why increasing term insurance plans makes sense are as follows –
1. Protect against inflating prices1
Inflation increases the price of goods and services over time. As such, household expenses increase with time. An increasing term policy increases the coverage level so that the family gets a higher payout if the assured passes away during the policy tenure. This higher payout may help the family meet the increased expenses easily.
2. For future goals
If the individual expects his goals to increase with time, increasing term insurance is a good choice. The plan enhances the sum assured so that the life assured or policyholder can plan for a more funds for the enhanced goals.
For instance, if the life assured is planning a family in the future, a higher corpus would be suitable for the child’s higher education and marriage.
3. For their affordability
Under increasing term plans, the sum assured increases over time but the premiums usually don’t change once the policy is issued. As such, you can enjoy increased coverage at constant and pocket-friendly premium rates as compared to other plans since the premium is determined basis the initial coverage amount, making this plan relatively affordable!
Advantages of Increasing Term Insurance Plan
Here are some advantages that make an increasing term plan useful –
● Helps as a backup where Financial expenses are increasing
While your expenses might be lower in current situations, they are expected to rise in future as your financial obligations increase. In such cases, the increasing term plan proves relevant. It accounts for the increasing financial expenses of your household and pays a higher sum assured in the case of an unfortunate premature death during the policy term. This may help your family to tackle the increased expenses in your absence.
● Cope against inflation
The increasing term plan may help you cope against inflation which drives up the cost of your financial goals. For instance, if higher education for your child might cost Rs.20 lakhs in current times, it may rise considerably a decade or two later. Thus, when you have an increasing term plan, you may be able to create a sizeable backup corpus against the inflated costs2.
● Affordable
The premium for increasing term plans are affordable.
There’s also an option to choose your premium payment mode. You can pay a lump sum premium at once and pay for a limited tenure or over the entire policy tenure. You can also break down the premium into half-yearly, quarterly or monthly modes to make it more affordable.
● Tax savings
Lastly, increasing term plans also offer tax benefits. The premium is deductible from your taxable income under section 80C, as per the provisions of the Income Tax Act, 1961. You can apply for a tax deduction of a maximum of Rs.1.5 lakhs only under old regime of Taxation. Moreover, the death benefit paid under the policy is also exempted from tax under Section 10( 10D) in your nominee’s hands, as per the provisions of the Income Tax Act, 1961.
Who Should Buy An Increasing Term Plan?
An increasing term policy becomes all the more relevant in the following instances if–
You want to create a backup corpus taking inflation into consideration, for your family in your absence
Your financial responsibilities or expenses would increase in the future
You want to opt for a higher sum assured for your family’s complete financial security.
How To Buy An Increasing Term Insurance Policy?
An increasing-term insurance policy is available online as well as offline. Here’s how you can buy the policy –
● Offline
You can visit the branch of the insurance company or contact an insurance agent. Fill up a physical proposal form and submit it with your relevant documents. The insurance company will underwrite the proposal and issue the plan.
● Online
You can visit the insurer’s official website or an insurance marketplace to buy increasing term insurance online. Fill up the online application form and pay the premium online. The insurer would assess your proposal and process the policy issuance accordingly.
Comparison of Increasing Term Insurance Plans With Other Types Of Insurance Plans
Here’s how increasing term plans fare against other types of term insurance plans –
Parameters | Increasing term insurance plans | Decreasing term insurance plans | Level term insurance plans |
Coverage | The coverage increases over the policy tenure | The coverage reduces over the policy tenure | The coverage remains the same over the policy tenure |
Premium | The premium may usually be higher compared to decreasing and level term insurance plan | The premium may usually be lower among the three since the coverage reduces with time | The premium is usually higher than decreasing term plans but lower than increasing term insurance plans |
Suitability | Term Insurance with increasing coverage is suitable for tackling inflation, planning for additional financial goals and also for increased security | Decreasing term plans are suitable for debt repayments. The sum assured of these plans can be linked with the reduced balance of the debts so that if the insured passes away prematurely, the outstanding loan can be paid using the reduced sum assured | The plan is suitable for every individual looking to create financial security for their families in their absence. It can fulfil different goals. |
Conclusion
An increasing term plan increases the effective coverage level every year. It helps meet your increasing financial responsibilities and provides financial security against unforeseen situations. So, assess your needs and then opt for the increasing term plan if it aligns with your coverage requirements.
FAQs
1. What are the circumstances in which the coverage amount increases?
Usually, in increasing term plans, the sum assured increases at regular intervals at predefined rates. However, if you choose plans which offer the option to increase the sum assured at important milestones of life, the coverage would increase on those milestones, for example, marriage, and childbirth.
2. Can I add riders like critical illness or disability coverage to an Increasing Term Insurance Plan?
Yes, increasing term insurance plans might offer optional riders with the coverage. You can add the available riders and enhance the scope of the policy. Contact your insurance provider to know more.
Source:
1. https://mintgenie.livemint.com/news/personal-finance/what-is-an-increasing-term-life-insurance-plan-and-why-should-you-choose-it-151689735688632
2. https://www.bajajfinservmarkets.in/insurance/term-insurance-plans/articles/increasing-term-insurance-plan.html
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