Term insurance plans are one of the tools of financial security. These plans help you secure your family’s financial needs in the face of unexpected contingencies. Moreover, there are different varieties of term insurance policies available in the market. One such policy is the increasing term plan. Let’s understand what the plan is all about.
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 has increased to the maximum limit.
If the insured 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 –
The premium of an increasing term plan remains constant over the policy tenure. Though the sum assured increases every year, the premium doesn’t.
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.
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 –
Accidental Death Benefit Rider
Accidental deaths are covered under the rider. In the case of accidental death, the sum assured offered by the rider is paid
Critical Illness Rider
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
Waiver of Premium Rider
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
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 allows your family to tackle the increased expenses in your absence.
● Effective against inflation
The increasing term plan may prove effective 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 costs1.
Though an increasing term plan offers higher levels of coverage, the premiums might be affordable. Being a protection-oriented plan, the affordable premiums can help you opt for suitable coverage.
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. Moreover, the death benefit paid by 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 –
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.
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.
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.