Increasing Term Insurance Explained

Increasing term insurance, also known as index-linked life insurance, is a term life insurance policy that keeps on rising in value over time. The increasing term insurance guarantees that your policy maintains its buying power and doesn’t erode in value due to inflation. Even though it is a sensible option to choose, you must weigh the cost implications and figure whether it will be cost-effective for you in the long run.  

This article will explain what an increasing term life insurance policy is, how it works, its advantages and disadvantages, cost, and whether it is worth it. 

What Is Increasing Term Life Insurance?

Increasing term life insurance is a kind of term life insurance plan where the face value of the policy (the death benefit) increases by a specific amount each year. That makes it a great choice for those who want to benefit from increased death benefit coverage without additional riders. 

The policy premiums may fluctuate over time, depending on the policy type. To compensate for the larger death benefit, the premiums for increasing term policies tend to be higher than those of level term insurance. 

How Does Increasing Term Insurance Work?

The increasing term life insurance policy works in the same manner as any other term life insurance product. You’ll need to pay a premium, which will either be fixed or increasing and, in exchange, your nominees will get a tax-free death benefit upon your death. 

When you purchase an increasing term insurance policy, you have to decide on the face value, just like you would in any other insurance policy. The insurer will determine the sum assured, which will be the flat-rate or percentage amount that the death benefit will increase by every year you keep the policy, along with the maximum limit.  

Let’s look at the difference in a payout when you choose to increase the face value of the 20-year insurance policy by percentage and by a flat rate.

Increasing Term Insurance by Percentage

Increasing Term Insurance by Flat Rate 

Advantages and Disadvantages of Increasing Term Insurance

Like all types of insurance policies, the increasing term insurance also has many advantages you can benefit from along with some disadvantages, which we will be sharing with you.

Advantages of Increasing Term Insurance:

The reason most people prefer increasing term insurance policies over others is because of the following benefits:

• Coverage of Rising Costs

Life gets more expensive as you start to age, and you will require more coverage from your insurance policy in the future. In case you’re about to start a family or buy a large home, increasing term insurance can cover the rising costs. 

• Inflation Protection 

The value of money starts decreasing over time. If you purchase a 30-year term life policy worth $150,000 today, it won’t remain as valuable in the future. An increasing term life policy protects you from inflation, gradually increasing the death benefit. 

• Affordability

Like most term life insurance policies, the increasing term insurance policy is considerably less expensive when compared to permanent life insurance coverage.

• No Additional Underwriting 

With an increasing term insurance policy, you can increase your coverage in the future without undergoing a new medical exam or reapplying with your insurer.

Disadvantages of Increasing Term Insurance

Increasing term insurance policies also have some disadvantages you should be aware of. These include the following:

• Higher Initial Premiums 

Initially, you will need to pay higher premiums and get less protection with an increasing term insurance policy. So, be ready for that. 

• Maximum Limits Prevent Higher Payouts

The death benefit will gradually grow over time. However, it will stop increasing when it reaches the maximum limit established by the insurer. Don’t worry, though; your policy will still stay in effect.

• Premiums Can Fluctuate 

With some policies, the premiums charged for the increasing term insurance policy will fluctuate from one month to the next. That means you will not be paying a fixed amount each month. 

How Is Increasing Term Different from Other Types of Term Life Insurance?

The main difference between the increasing term insurance policy and other types of term life insurance is the death benefit amount your beneficiary will receive upon your death. Unlike increasing term insurance, level term policies have fixed premiums and death benefits that stay the same throughout the policy. 

Another option is the decreasing term insurance policy, where the payout will decrease over the length of the policy. The term rates for decreasing policies are lower than other term insurance types and provide you with an excellent way to help your family cover their mortgage or other debts. 

Using Riders to Increase Your Insurance Coverage 

You can incorporate riders and optional additions in some permanent policies and most term life insurance policies to extend the coverage and add flexibility to the terms and conditions. 

There are various life insurance riders that you can go for instead of buying an increasing term policy. A few of them are described below.

• Term Conversion Insurance Rider

If you need life insurance coverage and you’re nearing the end of your term, a term conversion rider can be used for converting your term life policy into a whole life or permanent insurance policy. You will need to pay more if you want to add more coverage. At the same time, the rider will help you avoid extra expenses caused by health issues or advanced age because you won’t need to take a medical exam. It’s more cost-effective than reapplying for a new policy. 

• Guaranteed Insurability Rider

You can add a guaranteed insurability rider if you own a permanent life insurance policy. The rider lets you increase the death benefit after significant life events like a birth or a marriage. It has the same benefits as an increasing term insurance policy, making it worthwhile when you get older and need more coverage. The rider doesn’t come cheap, but it does allow you to skip a medical exam. 

Is Increasing Term Life Insurance Worth It?

Most customers who buy increasing term insurance say that it offers protection against inflation. Plus, it allows them to grow their assets over time. Even with all its benefits, people rarely purchase increasing term life insurance in the United States. That is mainly because of the complicated death benefit structure and the high premium costs. However, if you are willing to pay the high premiums for the extra coverage, increasing term life insurance will be worth it. 

Pros

• Protection against inflation 
• No additional underwriting if you need more coverage
• Coverage of future expenses like buying a home or paying for children’s education 

Cons

• Higher initial premiums for less protection 
• Maximum limits can prevent larger death benefit payouts 
• Premiums can fluctuate