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What is Increasing Term Insurance Plan & How it Works?

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An increasing term insurance plan is a type of insurance where the amount of coverage goes up over time. Our financial status changes as we go through different life stages and ages. Due to potential changes, the initial coverage amount might not be enough because of inflation.

With more coverage, you stay better protected and aligned with your financial goals. This type of insurance provides a death benefit to your beneficiaries if you pass away, helping your family handle the financial impact.

Key Insights about Increasing Term Insurance Plans

An Increasing Term Insurance Plan offers life coverage that grows over time to match inflation and changing financial needs. Below is an overview of its key features:

Feature	Description
Plan	Sum assured increases at regular intervals.
Premium	Generally higher due to increasing coverage.
Sum Assured	Increases by a fixed percentage each year.
Eligibility	Available to individuals meeting age and health criteria.
Benefits	Provides increasing coverage to keep up with inflation.
Death Benefit	The sum assured will be paid to the nominee if the insured passes away during the policy term.
Maturity Benefit	Typically, there is no maturity benefit as it is a pure-term plan.
Tax Benefits	Premiums paid is eligible for tax deductions under relevant tax laws.

What is an Increasing Term Insurance?

Increasing term insurance, as the name implies, is a kind of insurance plan in which the base sum assured increases by a specific amount annually.

Thus, it keeps pace with rising inflation and increasing financial liabilities. The premium for an increasing term plan is usually higher than a traditional one. Still, it allows you to increase your coverage without having to buy a new policy.

An increasing term plan is an excellent option for individuals who want to ensure their insurance coverage keeps pace with their changing financial needs.

How Does an Increasing Term Insurance Plan Work?

When purchasing a policy, the initial coverage amount is set, and the sum assured typically increases annually at a fixed rate, usually 5% to 10%. This increases premiums for increasing term insurance, which provides enhanced protection.

The policy duration for increasing term insurance usually ranges from 10 to 30 years. The longer the duration, the higher the premium rates. Conversely, a shorter policy duration leads to slightly lower premiums but a lower total sum assured by the end of the term.

The death benefit increases by a percentage throughout the policy term, ensuring that the financial protection for your loved ones grows alongside your needs.

Understanding Increasing Term Insurance Scenarios with Illustration

Let’s understand the workings of an increasing term plan with an example.

Raman, a 30-year-old software engineer from Bengaluru, is the sole breadwinner of his family, including his parents, wife, and little daughter. Aware of his financial responsibilities, Raman invests in a term insurance plan to ensure his family remains financially secure in his absence.

He chose an increasing term insurance plan with a base sum assured of 50 lacs for 30 years. The policy states that the base sum assured will increase by 5% annually, and the premium will remain constant for a set time.

Policy Year	Sum Assured
Year 1	₹50 Lakhs
Year 2	₹52.50 Lakhs
Year 3	₹55.12 Lakhs
Year 4	₹57.88 Lakhs
Year 5	₹60.77 lakhs
Year 10	₹77.56 lakhs
Year 15	₹94.27 lakhs
Year 20	₹1 crore

The policy states that the sum assured is limited to a maximum increase of 100%. Therefore, after the 20th year of the policy, once the sum assured reaches ₹1 crore, it cannot be raised any further.

Let’s see the different cases that might occur:

Case 1: Mr. Raman Survives the 30-year Policy Period.

In such cases, the policy will terminate on maturity, and no maturity benefit will be paid since it’s a pure-term plan.

Case 2: Mr. Raman Dies in the 5th Year of the Policy.

In the 5th year, the sum assured would be ₹60.77 lacs. This sum assured would be paid to his beneficiary.

Case 3: Mr. Raman dies in the 27th policy year.

As mentioned, the sum assured would stop increasing beyond ₹1 crore in the 20th year. Thus, if Mr Raman dies in the 27th year, his dependents would receive ₹50 lacs + ₹50 lacs.

Benefits of Increasing Term Insurance Plan

Here are some of the major benefits of an increasing term life plan:

Helps to Beat Inflation

Insurance plans are long term investments. We usually buy term plans for 15-20 years. However, coverage that seems enough today might not be adequate tomorrow, with the ever-increasing inflation.

Thus, the increasing sum assured of the policy helps to keep up with inflation, ensuring that the policyholder's financial needs are met at every stage in the future.

No Additional Underwriting Required

In these plans, the sum assured increases annually at a predetermined rate. Since it’s the same policy, you don’t have to undergo the process of underwriting every time the sum assured increases.

In the other case, if you had to buy a new policy to increase your sum assured, you will need to go through the hassle of underwriting again.

Provides Adequate Financial Protection

A person might not be aware of their future liabilities while buying their first term plan. With increasing age, the responsibilities evolve, the liabilities increase and financial goals change.

An increasing term plan offers increasing death benefit over time, ensuring that the policyholder's family is adequately financially protected, and their goals are met in case of untimely demise of the policyholder.

Flexible Premium Payment Options

You have the flexibility to select your premium payment schedule. You can make a single lump sum payment for a limited period or throughout the policy. Alternatively, you can split the premium into half-yearly, quarterly, or monthly payments for higher flexibility.

Tax Benefits

You can avail tax benefits on your premiums paid and the death benefit received under Section 80C and Section 10(10D) of the Income Tax Act, as per the prevailing tax norms.

Features of Increasing Term Life Insurance

The major features of increasing term insurance include the following:

Constant Premium Rates

An increasing term plan is an affordable way to ensure your family's financial security in the long run. While the sum assured increases every year, the premium is decided at the inception of the policy and remains constant throughout its tenure.

Increasing Coverage

The increase in sum assured that this term plan offers happens at a certain rate. This rate is decided at the inception of the policy and remains the same throughout the policy tenure. Some policies also cap the maximum sum assured that can be reached.

Flexible Death Benefit Payout

While some plans pay the death benefit as a lump sum on the death of the life assured, a few others provide you the flexible option of receiving a death payout in the form of monthly, increasing monthly or monthly + lump sum instalments.

4. Additional Riders

You can customise your plan with additional riders as per your requirements. They can be added for a nominal fee and enhance your policy coverage. Some of the most common riders are critical illness riders, accidental death riders, disability riders, terminal illness riders, etc.

Eligibility Criteria for Buying Increasing Term Insurance Plan

To be eligible for an increasing term insurance plan in India, you typically need to meet the following criteria:

Criteria	Description
Age	Typically, between 18 and 65 years.
Health Status	Insurers require medical tests to assess health risks before issuing a policy. Your medical history can influence term insurance premiums and the maximum sum assured.
Income	There is generally no minimum income requirement for purchasing.
Occupation	Professionals, salaried individuals, self-employed persons, and housewives. Certain high-risk occupations may be restricted.
Citizenship	Indian

Documents Required for Buying Increasing Term Insurance Plan

To opt for an increasing term insurance plan, applicants are required to submit the documents listed below:

Document Type	Required Documents
Identity & Address Proof	Aadhaar Card Passport Voter ID Driving License PAN Card Electricity Bill & Rent Agreement (Address Proof)




Income Proof	Salary slips (last 3 months) Income Tax Returns (last 3 years) Form 16 Bank statements (last 6 months) CA certificate (for self-employed)








Age Proof	Birth Certificate School/College Leaving Certificate Passport Aadhar Card



Medical	Medical Reports Lab Test Results
Nominee Details	Nominee’s Identity Proof Nominee’s Address Proof



Other Documents	Policy Proposal Form Photograph Bank Account Details

Note: Each section requires one or two documents as proof for a guaranteed return plan, depending on the insurer's requirements.

How to Buy Increasing Term Insurance Policy Online?

Buying an increasing term insurance policy online is a straightforward process. Here are the steps you can follow:

Step 1

Compare different insurance companies focusing on stability and policy terms

Step 2

Decide on the amount and request quotes for increasing term policies.

Step 3

Check the coverage and premium increase rates.

Step 4

Fill out the application form with accurate personal and medical information.

Step 5

Pay the premium online using a secure payment method.

Once your application is approved and payment is made, you will receive the policy documents via email or the insurer’s online portal.

How to Choose the Right Increasing Term Insurance Policy?

Choosing the right increasing-term insurance policy involves careful consideration of your financial needs, research, and professional advice. Here is how to go about it:

1. Identify Financial Obligations

Consider current and future expenses such as mortgage, debts, education and living costs.

2. Plan for Future Growth

Account for inflation and potential increases in your family’s financial needs over time.

3. Research Multiple Insurers

Insurers offer varying rates, benefits and policy terms.

4. Evaluate Policy Features

Look at how the premiums and coverage amounts increase over time and consider any flexibility or additional riders offered.

5. When to Seek Professional Advice

A financial advisor or insurance broker can provide personalised advice if you have complex financial needs or need clarification on the policy details.

6. Tax Benefits and Legal aspects

Understand your policy's legal and tax implications.

Are There Any Drawbacks of Increasing Term Insurance?

Increasing term insurance comes with a few notable drawbacks:

Higher Premium Costs

As the coverage amount increases over time, so do the premiums. This can lead to significantly higher costs as the policyholder ages, which might become burdensome, especially if their income doesn’t rise proportionally.

Complexity

The structure of increasing term insurance can be confusing for policyholders. Understanding how and when the coverage and premiums increase requires careful consideration. This complexity might make it difficult for policyholders to plan their finances effectively.

Limits on Death Benefit

There are often maximum limits on how much the death benefit can increase. Even though the benefit grows, it might not cover all future needs.

Who Should Opt for an Increasing Term Insurance?

Though an increasing term plan can be useful to anyone looking for financial coverage, it is more beneficial for certain groups of people like:

1. Young Professionals

Young professionals have just started their careers. They have a higher earning potential in future but are not sure what liabilities the future holds for them. An increasing term plan provides adequate coverage as their income increases.

2. Individuals with Dependents

Individuals with dependents such as children, spouses, or parents should opt for an increasing term insurance plan. Children will need future funds for education and parents will need medical aid.

Other liabilities would also increase with time. Hence, an increasing term plan ensures that their family is financially protected in case of their untimely demise.

3. People with Inflationary Pressures

People who have good income and are concerned about inflationary pressures must consider buying an increasing term plan.

With good income and elevated lifestyle, they have higher liabilities and concerns about future cost of living. An increasing term insurance plan in this case offers protection against the rising cost of living.

4. Individuals with Long-term Financial Goals

Individuals who have long-term financial goals such as child's education or retirement should opt for an increasing term insurance plan.

While you are saving through investment for these goals, there must be a term insurance with increasing cover to save these long-term goals in case of your unfortunate demise. An increasing term plan offers financial protection and helps to keep up with inflation.

Comparing Increasing Term Insurance with Other Types of Term Insurance

Here is a comparison between the three main types of term plans- Level Term Plans vs Increasing Term Plans vs Decreasing Term Plans:

Point of Difference	Level Term Plan	Increasing Term Plan	Decreasing Term Plan
Death Benefit	The death benefit remains constant throughout the term.	The death benefit increases over the term.	The death benefit decreases over the term.
Premium	Generally lower compared to increasing term plans but may be higher than decreasing term plans at the start.	Typically, higher than level and decreasing term plans due to the increasing coverage.	Generally, starts higher than level term but decreases over time, often lower than increasing term plans.
Coverage Needs	Suitable for those with relatively stable financial obligations.	Ideal for those expecting a growth in financial responsibilities.	Best for those whose financial obligations decrease over time, like a mortgage.
Financial Planning	Provides a predictable safety net for beneficiaries.	Helps keep pace with inflation and increasing living costs.	Aligns with decreasing liabilities, preventing over-insurance and optimising budget.
Target Audience	Individuals with a clear understanding of their long-term financial needs.	Those anticipating significant life changes, such as starting a family or career progression.	Primarily borrowers or those with diminishing financial obligations over time.

Tax Benefits of Increasing Term Insurance Plan

Term insurance is primarily a protection tool rather than an investment, but there are still tax benefits associated with it:

Tax Deduction on Premium Paid

Premiums paid for a term insurance plan qualify for tax deductions under Section 80C of the Income Tax Act 1961. The maximum deduction allowed under this section is ₹1.5 lakh per financial year. The deduction applies to premiums paid for policies covering yourself, your spouse, and your children.

Tax-Free Death Benefit

The death benefit the nominee receives under a term insurance plan is entirely tax-free under Section 10(10D) of the Income Tax Act. There is no upper limit on the amount that can be received tax-free as a death benefit, provided the premium does not exceed 10% of the sum assured for policies issued after April 1, 2012.

An Increasing Term Insurance Plan is ideal for those wanting their coverage to grow with inflation and rising financial responsibilities. The death benefit increases over time, ensuring your loved ones are well-protected as your obligations expand. Key benefits include protection against inflation, adaptability to changing needs, and future security.

However, premiums are generally higher than level-term policies due to the potential for larger payouts. This plan is especially suitable for younger individuals anticipating greater responsibilities in the future. Overall, it’s a cost-effective way to ensure financial stability for your family.

FAQs about Increasing Term Insurance

Can I get a loan against my increasing term insurance plan?

No. Any kind of term insurance plan does not have a savings component and hence can’t be taken loan against.

How is the premium for an increasing term insurance plan calculated?

The premium for an increasing term insurance plan is calculated based on the policyholder's age, sum assured, policy term, premium payment frequency, and health condition. It is usually a bit higher than the traditional term plans.

Can I increase the base sum assured of my increasing term insurance plan after buying it?

No, the base sum assured of an increasing term insurance plan cannot be increased after buying it. The policyholder needs to purchase a new policy if they want to have a higher sum assured.

Why should I choose increasing term insurance over a level term policy?

You can choose increasing term insurance if you expect your financial responsibilities or the cost of living to increase over time, such as covering a growing family's needs or accounting for inflation.

Can the increase in coverage be customized?

Yes, many insurers offer the option to customize the rate at which the death benefit increases, though this will also affect the premium adjustments.

Is there a limit to how much the coverage can increase?

Yes, insurers typically set a cap on the maximum coverage amount or the rate of increase to manage their risk.

How are the increases in coverage reflected in the policy premiums?

The premiums will increase at predetermined intervals to reflect the higher amount of coverage being provided.

Is a medical exam required for increasing term insurance?

This depends on the insurer, the insured and the policy. Initially, a medical exam may be required, but subsequent increases in coverage might not require additional exams.

Does increasing term insurance provide any cash value?

No, increasing term insurance does not accumulate cash value like whole life or universal life insurance policies do. It's a term plan and provides only life cover.

How does inflation impact the decision to choose increasing term insurance?

Inflation can erode the purchasing power of a fixed death benefit over time, making increasing term insurance an attractive option for those looking to maintain the real value of their coverage

Under what circumstances does the coverage amount increase?

In increasing term plans, the sum assured typically rises at regular intervals according to predefined rates. However, some plans offer the flexibility to boost the sum assured at significant life milestones, such as marriage or the birth of a child.

Which component increases in an increasing term insurance plan?

In an increasing number of term insurance plans, the death benefit rate has risen over time. This ensures that your beneficiaries receive a larger payout, helping them cope with the financial impact of your passing.

What is an increasing term insurance plan?

An increasing term insurance plan is a type of life insurance where the death benefit increases over time. This increase can offset inflation and provide more coverage as financial responsibilities grow.

How does an increasing term insurance plan work?

The death benefit in an increasing term insurance plan rises annually by a specified amount or percentage. Depending on the policy terms, premiums may also increase.

Who should consider buying an increasing term insurance plan?

Individuals expecting higher financial responsibilities, such as increasing home loans, education expenses, or retirement planning, should consider this plan. It’s also suitable for those wanting to evade inflation.

What are the benefits of an increasing term insurance plan?

Benefits include protection against inflation, increased coverage over time, and matching growing financial needs without purchasing additional policies.

Are there any drawbacks to increasing term insurance plans?

The primary drawback is that the premium will increase over time as the sum assured grows. This can lead to higher out-of-pocket expenses, especially if your income doesn't keep pace with the premium increases.

If your financial situation changes significantly, you may find it difficult to maintain the policy, potentially leaving your beneficiaries unprotected.

How does an increasing term insurance plan differ from a level term insurance plan?

In an increasing term plan, the death benefit rises over time, whereas in a level term plan, both the death benefit and premiums remain constant throughout the policy term.

How do I apply for an increasing term insurance plan?

You must provide personal details, health information, and financial goals to apply for an increasing term insurance plan. Compare insurance policies based on premium, sum assured, and increase rate. Choose a plan that aligns with your needs. Submit the application form, medical test and payments. Once approved, your coverage will start.

What documents are required to apply for an increasing term insurance plan?

To apply for an increasing term insurance plan, you will typically require documents such as proof of identity, address proof, income proof, and medical records. The insurer may request additional information based on their underwriting criteria.

What happens to my increasing term insurance plan if I outlive the policy term?

If you outlive the policy term of your increasing term insurance plan, the coverage simply expires. No further benefit will be paid. Increasing term insurance is designed to provide a growing death benefit over a specific period. Once the period ends, the policy no longer offers any protection.

How does the increasing term insurance plan handle pre-existing conditions?

Increasing term insurance plans typically require medical underwriting. Depending on the insurer's policies, pre-existing conditions may lead to higher premiums or exclusions.

What is the difference between increasing term insurance and decreasing term insurance?

Increasing term insurance features a rising death benefit, while decreasing term insurance has a declining death benefit over time. Term insurance is often used for mortgage protection.

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Disclaimer

This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.

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Author: Team Digit

Last updated: 13-12-2024