Table of Contents
Table of Contents
- Increasing term life insurance provides a death benefit that grows over time, helping offset inflation and rising costs. This can be beneficial for families expecting expenses to increase.
- Premiums for increasing term policies are typically higher than level term policies with the same initial coverage amount. Some policies also increase premiums over time.
- The death benefit can increase annually by a percentage or periodically by a fixed dollar amount. Pay attention to any caps on benefit increases.
- Riders like guaranteed insurability allow increasing coverage without new underwriting. Term conversion riders permit switching to permanent insurance later.
- Increasing term insurance makes the most sense for households expecting rising expenses. It may not suit families anticipating shrinking costs. Shop around for the best policy.
Term life insurance is generally a cost-effective way to help financially protect your loved ones when you pass away. However, because most term insurance policies have a fixed death benefit for the duration of the policy, it may not provide the flexibility some families need.
Increasing term insurance — also known as incremental life insurance — can help in such situations. These policies have a life insurance death benefit that increases over time, providing additional protection if your family grows or you wish to help address rising costs down the road. This type of insurance helps provides a buffer against inflation, which can make a benefit amount worth less in the future. Here are some key details to know.
Increasing Life Insurance 101
Term life insurance has long been popular with people looking for a simpler, more affordable way to financially help their loved ones. Such policies only provide coverage for a set period of time (the "term"). Unlike permanent insurance, they typically don't offer cash value available to tap for financial needs while you're still living, unless you fund it properly with the goal to access the cash value via withdrawals and loans to supplement retirement income. But term policies generally come with much lower premiums, making them a solid choice for life insurance customers who are most interested in the death benefit.
The vast majority of term insurance policies are level. That means their premium and death benefit remain the same the entire time the coverage is in effect. That can be an advantage for households that desire a predictable insurance outlay.
However, some insurers also offer increasing term insurance. The face value of such a policy actually goes up every year or every few years. You may want to consider this alternative if, for example, you expect to have more children, commit to a major purchase in the next several years or make any other changes that could increase the living expenses for your surviving family members.
Incremental life insurance, as it's sometimes called, also helps fight the impact of inflation over time. Consider that a $250,000 policy that you buy today likely won't have the same purchasing power a few years from now. By having insurance that bumps up the death benefit at specific intervals, you're helping do what you can to help your beneficiaries address rising prices.
By guaranteeing a larger payout in future years, the insurance company assumes a greater risk. Therefore, increasing term policies typically cost more than level policies for the same initial coverage. Depending on the insurer, your premiums may also increase over the course of the term. Be sure to ask whether that's the case before you purchase a policy. If rates do adjust over time, you'll need to be willing and able to make those higher payments.
Considering Percentage vs. Flat-Rate Policies
Depending on the type of increasing term policy, the life insurance death benefit may increase in either of two ways. The face value may grow by a fixed amount every few years, or it can increase by a percentage every year — often on the policy anniversary date or your birthday — based on the original death benefit amount.
To illustrate how these methods could affect your policy's value, consider two 10-year term policies that both have an initial benefit of $100,000. One is a flat-rate increasing policy in which the coverage grows by $10,000 every five years. Therefore, the death benefit would equal $100,000 in years 1-5 before increasing to $110,000 in years 6-10.
The other might have the same duration and starting death benefit but with a 3% annual increase in coverage. Here's what the death benefit would look like over the policy period:
- Year 1: $100,000
- Year 2: $103,000
- Year 3: $106,000
- Year 4: $109,000
- Year 5: $112,000
- Year 6: $115,000
- Year 7: $118,000
- Year 8: $121,000
- Year 9: $124,000
- Year 10: $127,000
Clearly, the policy that increases annually at a set percentage ends up offering a larger death benefit. In year 10, the difference between the two hypothetical policies' death benefits would be $17,000.
Keep in mind it's not the method of calculating the benefit step-up that's important — it's the amount of the actual increase that matters. When comparing different incremental term policies, you'll want to convert any percentage increases you come across into actual dollars for an apples-to-apples comparison.
Even with increasing life insurance, some policies have a limit beyond which your death benefit cannot exceed. Be sure to ask your agent or broker if there's a cap, so you're not caught by surprise after you have the coverage.
Alternative Ways to Boost Coverage
Purchasing term life insurance with an increasing benefit isn't the only way to boost your coverage should your family's financial needs grow. You could purchase an additional policy to supplement or replace your existing policy. However, that approach comes with a couple of notable disadvantages.
For one, you'll likely pay higher premiums as you get older. Secondly, you'll likely need to go through medical underwriting before the insurer extends coverage to you. If you've acquired any medical conditions since the last time you applied for life insurance, you potentially could face higher rates or even be denied coverage.
Adding a Rider
You can get around the underwriting requirement, but it'll likely cost you. A guaranteed insurability rider allows you to increase the amount of your coverage at specific dates in the future — typically every three or five years — or when you experience a life milestone, such as the birth of a child.
With a guaranteed insurability rider, the carrier uses the same health rating you obtained when you set up your original policy. However, your pricing is based on your current age, not your age when you bought your existing coverage.
Here's another hypothetical example: Say you purchased a 20-year term policy worth $300,000 at age 25, when you received an "excellent" rating based on your health and lifestyle profile. At age 35, you bought a home that significantly increased your family's monthly expenses, resulting in the need for a larger policy. If you have a guaranteed insurability rider on your policy, you can buy additional coverage based on an "excellent" rating for a 35-year-old.
These policy add-ons tend to be relatively affordable, generally adding a few dollars a month to your total premium. But because insurance needs generally don't change significantly over shorter periods of time, they tend to make more sense for term policies with longer durations (or for permanent policies).
Extending Your Coverage
In case your loved ones need protection beyond your policy's expiration date, you may also consider a term conversion rider for your policy. Sometimes this benefit is available for the first few years of your policy at no extra charge, although you may have to pay for converting coverage beyond that period.
You typically can't increase your death benefit when you exercise a conversion rider, but it does allow you to retain coverage for a longer period — and without having to undergo medical underwriting. Because you're switching to coverage that lasts for life, you can expect your premiums to increase when you convert your existing policy. But you can't outlive your protection as long as you pay your premiums on time, and you'll have the ability to build cash value in your policy to boot.
Is Increasing Life Insurance Right for You?
Term policies with an incrementally rising death benefit can make sense for some families. Still, it's not the best option for everyone. Here are some advantages and disadvantages to consider when planning your insurance strategy:
- It helps provides some protection against inflation. As recent years have shown, it's hard to predict when inflation will spike. Even in periods of relatively low inflation, price increases erode the purchasing power of a dollar over time. Rather than counting on a level death benefit, increasing term insurance provides a payout that helps offset the effects of inflation.
- Increasing benefits can help families manage large future expenses. When choosing a life insurance policy, it's tempting to choose a benefit amount that would help your family cover just your current financial needs. But if, for example, you intend to buy a home or send children to college in a few years, your total costs could multiply. Having coverage that increases over the years can help make sure your loved ones can maintain their lifestyle after you pass away.
- You don't need underwriting to get more insurance. Some policyholders choose a more affordable "level" policy with the idea that they'll buy more coverage later if they need it. But if they do, they'll have to go through underwriting, where any future medical events or conditions could lead to more expensive premiums. With increasing term insurance, you don't need a medical review to obtain a larger benefit over time.
- It's relatively affordable. Term life insurance, including policies with an increasing benefit, tends to be less expensive than permanent life insurance. That generally makes them a solid route for budget-conscious individuals who still require financial protection for their loved ones.
- Premiums are higher than level-term policies. When you purchase an increasing term policy, the insurer will have to pay out more if the insured dies while it's in effect. Because the carrier is taking on more risk, it may charge higher premiums than level policies with the same initial death benefit.
- Premiums may rise over time with certain policies. In addition to a higher starting premium, some incremental term policies increase the monthly charges over the course of the term. You'll have to be able to absorb those higher costs, especially if you're on a tight budget.
- Some insurers have limits on benefit increases. With increasing term policies, the death benefit goes up by a fixed amount or by a certain percentage at specific intervals. But some insurers cap the total death benefit, so those increases may not be indefinite. If that's the case, your loved ones could end up with a smaller payout than they were expecting.
- Your insurance needs may diminish, not increase, in the future. Young families, especially those that are still growing, are likely to see their expenses escalate in the future. But that's not the case with every household. If you foresee certain large expenses going away — for instance, if you're planning to pay off student loans or a mortgage — your overall outlays may actually shrink. Paying more for an increasing term policy in that case may not make sense.
Many insurers don't offer increasing term policies, so shopping for the best coverage can require doing some homework. Research companies that offer these products, and seek out multiple quotes to compare. Because some policies come with a limit on the amount of the increases, make sure to find a company's rules before purchasing coverage. Don't hesitate to contact a financial professional if you think you would benefit from a personalized look at your unique situation.