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A 101 Guide to Increasing Term Insurance

Ashok wanted to purchase a term insurance plan, but was worried as his financial situation, because of his business, kept on changing. He was also worried about the effect of market variables like inflation on his policy. One day, at the office, he overheard his colleagues discussing benefits of increasing term insurance plan. Ashok joined them, and came to know that the plan took into consideration the dynamic financial situation of any policyholder, besides inflation and other factors which would necessitate a higher cover during later stages of life.

Understanding term insurance: A Term Insurance is a specifically designed life insurance policy that protects an individual’s family and provides them financial security in case of any eventualities. Like most insurance plans, an individual pays a premium for a given term. If the individual passes away during that term because of an accident or due to health reasons, the nominee is assured a death benefit equal to the value of the plan. The premiums are calculated on the basis of the health conditions, the life expectancy and the age of the individual. Insurers often ask the individual to conduct a medical check-up prior to finalising the policy.

Understanding increasing term insurance plan: An increasing term insurance plan is a policy where the amount selected for insurance, at the time of commencement of the policy, increases each year by a specific amount. This term insurance plan keeps into account variables like inflation, other market factors and increased responsibilities of an individual during the course of life. For example, if an individual purchases an increasing term insurance plan for an amount assured of Rs 20 lakh with the plan tenure of 30 years, for which there is a 5% simple rate of increase in the sum assured each year, up to a maximum increase of 200%, then the policyholder will reach the maximum increase by the 21st year of the policy. If the individual dies during the 16th year, an amount of Rs 35 lakh will be paid by the insurer.

Apart from providing a lump sum death benefit to the policyholder’s family, there are some plans which provide the option of paying the death benefit partly in lumpsum, and the rest in monthly or annual incomes. Riders like accidental death and disability and critical illness increase the scope of the plan’s coverage.

A key factor of this plan is that the premiums paid generally remains constant throughout the years. The insurer calculates the fixed premium taking into consideration the fact that the sum assured is going to increase each year. The premiums of this plan, however, are higher than a normal term insurance plan.

Benefits of increasing term insurance plan:

  1. Acts as a bulwark against inflation : This term plan is effective against inflation and the resultant price rise. A policyholder has an effective solution against the increase in expenses over the years. This key benefit of an increasing term insurance plan ensures that the family of the policyholder has a cover against increased expenditure.
  2. Designed to meet policyholder’s financial requirements: The financial situation of a policyholder can change in the future owing to many factors. There can be situations where there is an increased financial requirement because of increase in responsibilities like marriage, birth of a child and others. This plan allows a policyholder to keep the total sum assured in sync with the multiplied expenditures.
  3. Tax Saving: Another benefit of an increasing term insurance plan is that it saves your taxes. Just like other insurance plans, it offers tax-saving benefits under Section 80C of the Income Tax Act. Premiums up to 1.5 Lakhs including for the individual, the spouse, and the kids can fall under this category subject to other investments made by the individual. Death benefit pay-outs to the nominee are exempt from tax under Section 10D.
  4. Affordable: This plan is affordable as most insurance companies do not mandate high premiums. It can easily be availed at an affordable premium amount. The best part is that though premiums remain uniform, the coverage keeps on increasing.

Conclusion: An individual can opt for an increasing term insurance plan if one is young, and expects the future responsibilities to increase. One has to assess the change in financial situation in future , and select the requisite plan. This plan also takes into account inflation–an inescapable reality in the volatile market of the present.