How To Increase Your Term Life Insurance Coverage

Life insurance is a financial safety net that ensures your loved ones are taken care of in the event of your death. While term life insurance is a popular option, it may not always provide sufficient coverage. Increasing term life insurance is a way to boost your coverage over time without a new application or underwriting. This type of insurance is ideal for those who anticipate growing financial responsibilities or are concerned about the impact of inflation on their death benefit. However, it comes with higher premiums and fluctuating costs. Understanding when and why to increase your life insurance coverage is essential for ensuring your loved ones' financial security.

Increasing term life insurance and changing coverage needs

Term life insurance is a popular way to protect your loved ones financially in the case of your unexpected death during a specific period. However, as time goes on, your life changes, and the coverage you initially purchased may no longer be sufficient. Here are some strategies for increasing your term life insurance and adjusting your coverage to meet your evolving needs:

Understanding Term Life Insurance

Term life insurance provides a payment to your beneficiaries if you pass away before the policy expires. The term typically lasts for 10, 15, 20, or 30 years and is intended to cover financial obligations that end before the term. For example, a 30-year term might be chosen to cover a 30-year mortgage or future income, while a 10-year term could be suitable for a small business loan.

Increasing Coverage Due to Life Changes

As your life progresses, you may experience additional responsibilities and financial obligations. Life events such as getting married, having children, purchasing a larger home, or caring for ageing parents can increase financial pressure. To alleviate this stress, consider increasing your term life insurance coverage to provide extra protection at a relatively low cost.

Life events that can impact your coverage needs include getting married or divorced, losing the life insurance provided by your employer, or having children who graduate from college. These changes may lead you to adjust your coverage accordingly.

Increasing the Death Benefit

Many term life insurance policies have fixed death benefits, renewable terms, and non-cancellable coverage. While your premiums remain stable as you age, your coverage also remains fixed and does not increase with inflation. Another type of term coverage renews annually, resulting in lower initial costs but higher premiums as you get older, while the death benefit stays the same.

To address this, consider "increasing term" policies, which allow you to add to your death benefit by a certain amount or percentage at specified times without medical underwriting. However, these policies are not widely available.

Strategies for Boosting Coverage

Buying More Coverage in Advance

When you're younger and healthier, you can secure a larger death benefit for the same premium. This strategy, known as "buying big," involves purchasing more coverage than you currently need in anticipation of future needs. For example, a young couple with a mortgage might each opt for a 30-year, $1.5 million term policy, even if their only obligation is a $400,000 mortgage. These policies can be reduced later if needed.

Laddering Your Coverage

Laddering your coverage involves purchasing multiple term life insurance policies with different terms to align with your changing needs and budget. Instead of a single 30-year, $1.5 million policy, you could buy three smaller policies with 10-, 20-, and 30-year terms, adjusting for expected changes in responsibilities and savings.

Converting to a Permanent Policy

Consider a term life insurance policy that allows you to convert to permanent insurance. This option offers lower initial premiums and the flexibility to lock in a death benefit for life, even if your health changes. However, converting typically increases your premiums.

Extending Your Coverage

Life can present unexpected situations, such as additional family members, business ownership, or increased debt. To ensure sufficient protection, consider extending your coverage by purchasing additional term life insurance or exploring riders that enhance your policy.

Increasing the death benefit on your existing coverage

Many term life insurance contracts are written with a level death benefit, a renewable term, and non-cancelable coverage. While your premiums don't increase as you age, your coverage also doesn't increase, even with high inflation. This stability is considered one of the main benefits of life insurance.

Another type of term coverage renews annually and is initially more affordable, but the premiums increase each year as you get older while the death benefit remains the same.

Term life insurance contracts with provisions that allow you to add to your death benefit by a certain dollar amount or percentage at specified times without medical underwriting are called increasing term policies. However, they are not widely available today. Here are a few options that might work for you:

Buying big in anticipation of future needs

The younger and healthier you are, the larger the death benefit you can purchase for the same premium. That might be a good enough reason to apply for more coverage than you currently need. For example, a recently married couple in their mid-20s who just closed on a mortgage to buy their first home might decide to each buy a 30-year, $1.5 million term policy naming the other as the beneficiary—even though their only obligation right now is a $400,000 mortgage. These term contracts allow them to reduce their death benefit if they decide they want to cut back on their coverage (and therefore, their premiums) later on, which can be much simpler than adding extra coverage in the future.

Purchasing an additional term policy to ladder your coverage

Instead of trying to estimate your future coverage needs and paying higher premiums that you're not sure would benefit you, you might consider laddering your coverage. This means purchasing more than one term life insurance contract to more closely align your coverage with your needs and, possibly, your budget. For example, instead of purchasing one 30-year policy with a $1.5 million death benefit, you might purchase three smaller policies with 10-, 20- and 30-year terms. The 20-year policy might provide $1 million in coverage to account for the years when you expect to have the largest responsibilities and the least accumulated savings. Meanwhile, the 10- and 30-year policies might each provide an additional $250,000 in coverage to reflect a larger mortgage balance when you're younger and a just-in-case benefit when your children have moved out and you're approaching retirement.

Converting your term policy to a permanent policy

If you're looking for term life insurance with more flexibility, a contract that allows you to convert your term insurance to permanent insurance may be a good choice. You could benefit from the lower premiums of a term life insurance contract, as well as the ability to later lock in a death benefit for the rest of your life (as long as premiums are paid and the contract retains value), even if your health has deteriorated. Converting your policy typically increases your premiums. Permanent coverage costs more because it doesn't expire and can accumulate cash value that you can access for various purposes. You don't have to pass another medical exam or undergo another review of your medical history. If your health has improved, you might even want to apply for a new policy and see if you can get more coverage for the same amount of money (while keeping in mind that premiums tend to be higher the older you are).

Extending your coverage for additional reassurance

Life can change in ways you didn't anticipate in the years after you take out a term policy. You might have additional family members to provide for, obtain an ownership stake in a business, or take on additional debt. If you're not sure how much life insurance you need to protect your loved ones, a life insurance calculator can help you estimate your ideal coverage amount. Then, you can connect with a financial advisor who can customize your coverage to suit your needs and budget.

Buying big in anticipation of future needs

The younger and healthier you are, the larger the death benefit you can purchase for the same premium. This may be a good enough reason to apply for more coverage than you currently need.

Consider a recently married couple in their mid-20s who just closed on a mortgage to buy their first home. Both partners work full-time and plan to pursue decades-long careers. Their only financial concern is leaving the other one with a home they couldn't afford on one income. They agree that the upheaval of selling a home and moving shouldn't be part of the grieving process if one of them dies young.

They also have lots of dreams, though they aren't sure which ones they'll decide to pursue. Will they have children, and if so, how many? Will either of them start a business or take out loans to pursue an MBA? What about moving to a bigger home or a different part of the country that might have a higher cost of living?

They can foresee various scenarios where there'd be additional expenses to preserve their family's lifestyle, and their financial responsibilities could multiply. Accordingly, they decide to each buy a 30-year, $1.5 million term policy naming the other as the beneficiary—even though their only obligation right now is a $400,000 mortgage. These term contracts allow them to reduce their death benefit if they decide they want to cut back on their coverage (and therefore, their premiums) later on, which can be much simpler than attempting to add extra coverage in the future.

Inflation Protection

Inflation is the process of your money losing some value every year. Since traditional life insurance policies have fixed death benefits, they may become less valuable over time due to inflation. An increasing term life insurance policy guards against inflation by helping to boost your death benefit each year. That way, if you pass away several years into the policy term, your loved ones may not lose significant monetary value through inflation.

Increasing Benefits Can Help Loved Ones Cover Large Expenses in the Future

Inflation isn’t the only reason you might need a larger death benefit. Your loved ones may need more funds to help cover significant future expenses. For instance, imagine you plan to purchase a new, larger home. You may have higher monthly mortgage payments, utilities, repairs, and other expenses. An increasing term life insurance policy can help you prepare for those increases by helping to ensure your loved ones receive the financial protection they may need. Another example might be education. If you have a new child, you may need more coverage to help your family cover college costs.

No Need for Underwriting

Applying for a new term life insurance policy involves new underwriting. This means you’ll have to apply again and undergo another medical exam. However, increasing term life insurance can help you avoid this by increasing your death benefit each year to add to your coverage. This saves you time and energy filling out applications and fitting medical exams into your schedule.

Purchasing an additional term policy to ladder your coverage

Laddering your term life insurance coverage is a strategy that can help you manage your coverage and costs as your life changes. Here's how it works and why you might consider it:

Understanding the Ladder Strategy

Laddering term life insurance involves purchasing multiple term policies with different expiration dates. This strategy is designed to align with the reality that financial obligations and needs often change over time. By staggering the end dates of your policies, you can adjust your coverage and premiums as your life circumstances evolve.

For example, when you're younger, you may have higher financial needs due to a mortgage, growing family, or other responsibilities. As you pay off your mortgage, your children become financially independent, and your savings grow, your need for extensive life insurance may decrease.

Benefits of Laddering Coverage

Laddering your term life insurance offers several advantages:

• Flexibility: Laddering allows you to adjust your coverage as your needs change. You can increase or decrease your coverage by purchasing additional policies or letting existing ones expire, ensuring you have the right amount of protection at each stage of life.
• Cost savings: By staggering your policies, you can avoid being overinsured and paying higher premiums for coverage you no longer need. As shorter-term policies drop off, your coverage and costs decrease, resulting in cost savings over time compared to a single long-term policy.
• Alignment with life stages: Laddering enables you to match your coverage with your life stages. In the early years, when financial needs are typically higher, you can have more coverage. As your responsibilities lessen over time, your coverage and premiums decrease accordingly.
• Reduced risk of overinsurance: With laddering, you reduce the risk of being overinsured. You can adjust your coverage as your financial obligations change, ensuring you're only paying for the protection you truly need.

Implementing the Ladder Strategy

When implementing the ladder strategy, consider the following:

• Assess your financial needs: Evaluate your current financial obligations and future needs, including debt, income replacement, mortgage balance, and education costs. This will help you determine the amount of coverage required for each policy in your ladder.
• Stagger policy expiration dates: Purchase multiple term policies with different expiration dates. For example, you can have a 10-year policy, a 20-year policy, and a 30-year policy, ensuring that your coverage aligns with your needs at different life stages.
• Adjust coverage over time: As your life changes, adjust your coverage accordingly. For instance, if your children become financially independent, you may choose to let the shorter-term policies expire or purchase additional coverage if your financial obligations increase.
• Review and manage policies regularly: Regularly review your policies with your insurance agent to ensure they remain aligned with your financial goals. Consider factors such as conversion options, beneficiaries, expiration dates, policy riders, and premium costs.

Example of Laddering in Action

Let's consider an example to illustrate how laddering can work:

A 32-year-old married parent with a mortgage and a growing family wants to manage their life insurance costs effectively. They decide to implement the ladder strategy as follows:

• $1 million 10-year term policy: This provides maximum protection during the early years when financial needs are highest due to young children and a large mortgage.
• $500,000 20-year term policy: This policy ensures a total coverage of $1.5 million during the first 10 years and $500,000 during the second decade. It drops off as the children become financially independent in their 20s.
• $100,000 30-year term policy: With this policy, the total coverage reaches $1.6 million in the first decade and then gradually decreases. Even in their 60s, the policyowner still has this policy to support their spouse if they pass away prematurely.

By implementing the ladder strategy, this individual achieves cost savings over time compared to opting for a single long-term policy. The staggered policies provide tailored coverage at each life stage, ensuring adequate protection without overpaying for coverage they don't need.

Converting your term policy to a permanent policy

Converting your policy typically increases your premiums. Permanent coverage costs more not only because it doesn't expire after a certain number of years but also because it can accumulate cash value that you can access for various purposes.

Here's how to convert your term policy to a permanent one:

• Check your policy: Review the terms and conditions of your existing term policy to see if conversion is an option. Most modern policies offer this feature, but it's always good to confirm.
• Understand the conversion period: Some companies allow policyholders to convert at any point during the term of their policy. However, many insurers impose a conversion period, limiting when you can make changes. For example, a 20-year term policy might only allow conversions during the first 10 years.
• Contact your insurance provider: Reach out to your insurance agent or company to initiate the conversion process. You won't need to undergo a new medical exam or go through the underwriting process again.
• Choose the type of permanent policy: Select the type of permanent life insurance that best aligns with your financial goals. Common options include whole life, universal life, or variable universal life insurance. Each has its own pros and cons, so be sure to understand the differences before choosing.
• Calculate the new policy cost: Converting from term to permanent life insurance usually doesn't incur direct conversion fees, but your premium payments will likely increase. Consider the impact on your budget and whether you want to convert only a portion of your term policy to permanent coverage.
• Complete the conversion: Decide on a partial or total conversion of your existing policy. A financial advisor can assist with the necessary paperwork, and you'll need to review and sign a new contract.

Remember, while converting your term policy to a permanent one can provide peace of mind, it's important to weigh the increased costs carefully. Consult a financial advisor or insurance professional to ensure the decision aligns with your long-term financial goals and budget.

Frequently asked questions