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We all know that when buying a term insurance plan we should choose an optimal level of sum assured based on our requirements. The optimal level of sum assured should be determined based on our income-expenses schedule, the assets we have, the liabilities we owe and the financial goals we have in our life. But, does our financial situation stay the same?
Our financial situation is dynamic. It changes with our life stages and age. Moreover, even the rate of inflation necessitates a higher coverage level in later years of life. As such, estimating the correct amount of sum assured needed for a term life insurance plan might prove difficult. What if you need a higher cover later on in life?
An increasing term l insurance plan comes to your rescue in these situations. Do you know about the plan?
As the name suggests, an increasing term insurance plan is a term insurance plan wherein the sum assured chosen on plan commencement increases every year by a specified amount. It is just opposite to the decreasing term insurance plan.
The premium rate might or might not remain same throughout the plan tenure. However, the coverage allowed under the plan depends on the health of the insured at the time of buying the policy.
Increasing term insurance is typically designed keeping inflation and other changing circumstances in life in mind.
While this is the simplest and the most basic definitions of an increasing term insurance plan, the plan actually has many features, which include the following:
The sum assured, as stated earlier, increases every year. Some plans have a limit to the maximum increment in the sum assured and the increment stops after the maximum limit is reached even though the plan tenure continues. The rate of increase of sum assured might be expressed as a percentage or an absolute amount. In both the cases, the rate of increase is mentioned beforehand and stays the same throughout the plan tenure. If the sum assured increases by a percentage, the increase could be at a simple rate or at a compounded rate though a simple rate is usually the norm.
Even though the coverage increases every year, premiums under the plan usually remain constant throughout the plan tenure. The company accounts for the increase in the sum assured while calculating the premiums beforehand and so premiums are uniform. Usually, premiums paid in the initial years are higher than required to compensate for the lower premiums when the sum assured increases over time. Moreover, the premiums of an increasing term insurance plan are higher than premiums charged by a normal level term insurance plan or a decreasing term insurance plan.
Like normal term life insurance plans, increasing term plans also pay only a death benefit. The amount of death benefit is the sum assured applicable (after increase) at the start of the policy year in which the life insured died. While most increasing term insurance plans pay a lump sum benefit on death, there are some plans, which have been recently launched which have a monthly or annual income payout. These plans pay the death benefit partly in lump sum and partly in monthly or annual incomes or completely in monthly or annual incomes for a specified tenure after the death of the insured.
Riders are additional coverage features which, when opted, increase the scope of coverage. Riders can be taken by paying a minimal additional premium. Some popular riders available in most increasing term plans include –
So much for the plan’s definition and some important features, an increasing term insurance plan can be fully understood only through an example. So, here is an illustration of an increasing term insurance plan –
Example – Anil, aged 40 years, buys an increasing term insurance plan for a sum assured of Rs.20 lakhs. He chooses the plan tenure of 30 years. The plan allows a 5% simple rate of increase in the sum assured at the beginning of every year up to a maximum increase of 200% of the original sum assured.
Here’s is how his sum assured would increase during the plan tenure –
|Policy Term||Applicable Sum assured|
|Year 1||Rs.20 lakhs|
|Year 2||Rs.21 lakhs|
|Year 3||Rs.22 lakhs|
|Year 4||Rs.23 lakhs|
|Year 5||Rs.24 lakhs|
|Year 6||Rs.25 lakhs|
|Year 7||Rs.26 lakhs|
|Year 8||Rs.27 lakhs|
|Year 9||Rs.28 lakhs|
|Year 10||Rs.29 lakhs|
|Year 11||Rs.30 lakhs|
|Year 12||Rs.31 lakhs|
|Year 13||Rs.32 lakhs|
|Year 14||Rs.33 lakhs|
|Year 15||Rs.34 lakhs|
|Year 16||Rs.35 lakhs|
|Year 17||Rs.36 lakhs|
|Year 18||Rs.37 lakhs|
|Year 19||Rs.38 lakhs|
|Year 20||Rs.39 lakhs|
|Year 21 onwards till Year 30||Rs.40 lakhs|
From the 22nd policy year there would be no further increment in the sum assured as the maximum allowed increase is up to Rs.40 lakhs which has been attained in the 21st policy year itself.
If Anil dies in the 15th policy year, Rs.34 lakhs would be paid as the death benefit. However, if Anil dies any time after the 21st policy year, Rs.40 lakhs would be paid as sum assured.
As inflation increases gradually yet steadily every year, you need a coverage which beats inflation. An increasing term insurance plan helps you from those extra expenses that inflation brings along.. As the sum assured increases every year an increasing term plan is an effective tool against inflation and gives you a cover, which helps your family meet the increased financial expenses.
When you are not married you have little or no responsibilities. After marriage as you start your family, your responsibilities multiply. You have to plan for your kids, for paying off your loans, for creating assets and for creating a retirement fund. As your financial needs multiply your sum assured should also increase. An increasing term life insurance plan helps in meeting the increased financial responsibilities by increasing your coverage steadily over time.
The best part about increasing term insurance plans is that the premiums are low and affordable. Moreover, premiums also remain constant and do not put a strain on your pockets even though the coverage increases.
Yes, just like other life insurance plans, an increasing term insurance plan also saves your taxes. The premiums you pay for the plan are tax-free up to a limit of Rs.1.5 lakhs in one financial year. The death benefit you receive under the plan is also tax-free. Moreover, there is no limit on the tax-free benefit received under the plan.
An increasing term insurance plan is suitable for you if you are young and expect your responsibilities to increase in the future. The plan would increase the sum assured to pay for your increased responsibilities in future. Moreover, if you want a plan which pays a benefit which corresponds to the economic inflation, an increasing term life insurance plan is your go to plan. So, assess your needs and, if suitable, choose an increasing term insurance plan.
Given the advantages of an increasing term insurance plan and its suitability, you must be wondering about the availability of increasing term insurance plans in the Indian insurance market. Well, there are a handful of plans available in the market. Here is a list –
|Name of the plan||Allowed sum assured Limits||Rate of increase in the sum assured||Salient features|
|Birla Sun Life Insurance Protect @ Ease||Rs.30 lakhs and above||5% or 10% simple rate of increase in the sum assured at the start of every year|
|Birla Sun Life Protector Plus Plan||Rs.30 lakhs and above||5% or 10% simple rate of increase in the sum assured at the start of every year|
|SBI Life Smart Shield||Rs.25 lakhs and above||5% simple rate of increase in the sum assured at the start of every year|
|SBI Life eShield Plan||Rs.20 lakhs and above||10% simple rate of increase in the sum assured after every 5 policy years|