The Dynamic Nature Of Term Insurance: Unraveling The Ever-Increasing Coverage Component

Term life insurance is a type of life insurance policy that provides coverage for a certain period of time, or a specified number of years. If the insured dies during the specified term, the insurance company will pay a cash benefit to the policy's beneficiaries. Term life insurance can be further broken down into different types depending on the premiums and cash payouts. One such type is increasing term life insurance, where the death benefit increases over time. This type of policy is ideal for those who want to grow their coverage over time, as the death benefit can help to cover rising expenses and protect against inflation.

Higher premiums

Term life insurance is a type of life insurance policy that provides coverage for a specific period, such as 10, 15, or 20 years. It is often chosen by individuals who want to ensure their loved ones are financially protected in the event of their unexpected death. While most term life insurance policies offer level premiums and death benefits, there is also the option of increasing term life insurance.

Increasing term life insurance policies are structured so that the death benefit increases over time. This type of policy is ideal for those who need coverage now but anticipate requiring more comprehensive coverage in the future. The primary benefit of this type of insurance is that it enables the policyholder to increase their coverage without having to reapply or undergo additional medical examinations. This feature makes it a good option for individuals who are planning for life events such as purchasing a home or starting a family, as it allows them to increase their coverage to accommodate these new financial responsibilities.

However, one of the main drawbacks of increasing term life insurance is that it typically comes with higher premiums. These premiums may also fluctuate, resulting in varying monthly payments. The higher premiums are due to the increasing death benefit, which may cost the insurance company more in the future. Additionally, some policies have maximum limits on the death benefit, which prevents higher payouts once the limit is reached.

When considering increasing term life insurance, it is essential to carefully review the terms and conditions of the policy, as the premium structure can vary. While some policies may have stable premiums, others may require higher payments as the policyholder ages. It is also worth noting that increasing term life insurance policies are less common in the United States due to the higher risk they pose to the insurer.

Protection against inflation

Inflation protection is an important feature of insurance policies, particularly long-term care insurance, as it ensures that the benefits received can keep up with rising prices. This is especially important for long-term care insurance, which is typically purchased years before benefits are drawn upon. With the future costs of medical care expected to far exceed the policy benefit, inflation protection ensures that policyholders are not left with inadequate cover.

Inflation protection works by increasing the value of benefits by a pre-defined percentage at specific time periods, typically annually, to keep pace with inflation. This is often linked to the CPI. For example, a policy with 3% compound inflation protection will increase the benefit by 3% each year, with interest being applied to the new amount each time. This has a snowball effect, providing much higher benefits over time than simple interest, where interest is applied only to the original amount.

Inflation protection is particularly important for long-term care insurance as the costs of care are rising each year. For example, the average cost of a nursing home in 2023 is $108,000 per year, but with long-term care costs increasing by an average of 3-5% annually, this could rise to $800,000-$1,200,000 per year in 25 years. Inflation protection ensures that policyholders will not be left with inadequate cover when the time comes to make a claim.

Inflation protection is also an important consideration for term life insurance policies. As inflation reduces the purchasing power of money over time, a fixed insurance payout will be worth less in the future. Therefore, it is important to consider the impact of inflation on the rising liabilities and costs associated with age when purchasing a term policy. Term insurance policies that factor in inflation will increase the sum assured by investing in increasing term insurance policies, which raise premiums by a certain percentage each year.

Affordability

Increasing term life insurance is an affordable option for those who want to grow their coverage over time. While the premiums are slightly higher than level term policies, they are still much more affordable than whole life insurance. This makes increasing term insurance a good alternative to accumulating a higher death benefit without the huge financial burden.

The main benefit of increasing term life insurance is that it can help cover rising costs as you get older. For example, you might be planning to buy a house or start a family, and increasing term policies can help cover these increasing expenses. It can also protect against inflation by gradually increasing the death benefit, ensuring that the payout remains as valuable in the future as it is now.

Another advantage of increasing term insurance is that it does not require additional underwriting. With a term insurance policy, you can increase your coverage without re-applying with your insurance company. In contrast, standard policies require you to go through the underwriting process again to get a higher coverage policy.

The cost of increasing term insurance is generally higher than level term policies to compensate for the larger payout. The premiums may fluctuate depending on the insurance company, but they are typically higher to account for the increasing death benefit. However, despite the higher premiums, increasing term insurance is still a more affordable option than whole life insurance.

Overall, increasing term life insurance offers an affordable way to protect your loved ones financially. It allows you to increase your coverage over time without the need for additional underwriting, making it a flexible and cost-effective option for those who want to plan for their future.

No additional underwriting

Increasing term insurance allows you to increase your coverage without re-applying to your insurance company. You would need to go through the underwriting process again for standard policies to get a higher coverage policy.

Underwriting is the process through which an individual or institution takes on financial risk for a fee. This risk most typically involves loans, insurance, or investments. The term originated in the 17th century when marine vessels would be underwritten for insurance risk for overseas voyages. The insurance company would sub-scribe (literally to write underneath) the policy by signing their name at the bottom of the document and acknowledging consent that the policy is in force.

Underwriters assess the degree of risk of insurers' business. They help to set fair borrowing rates for loans, establish appropriate premiums, and create a market for securities by accurately pricing investment risk.

Underwriting for life insurance involves a comprehensive evaluation of factors such as age, gender, medical history, lifestyle, interests, and financial stability and is based on actuarial calculations of mortality rates, which is a standard practice in the insurance industry.

The underwriting phase for life insurance starts after you submit the application. It involves determining the appropriate coverage level and policy premium. An underwriter is assigned to your application to determine your risk profile. This allows the insurance company to adjust the premium and coverage as necessary.

Underwriting is a process that every applicant who applies for insurance coverage needs to go through. It helps determine whether an applicant is insurable and at what amount and cost to the applicant. It's designed to provide the fairest price for a person's risk profile.

The underwriting process for life insurance can take anywhere from two to eight weeks to complete. It may be longer if your potential insurer has questions or is waiting on a response from your doctor.

Tax savings

Term insurance is a type of life insurance policy that provides coverage for a certain period of time or a specified number of years. It is a pure protection plan that offers a death benefit to the policyholder's nominees in case of their death.

Term insurance is initially much cheaper than permanent life insurance, such as whole life insurance, as it is not designed to last through old age. Term insurance also has no cash value.

There are several types of term insurance policies available, including level term, increasing term, and decreasing term. Level term insurance policies have level premiums and a constant death benefit, while increasing term insurance policies have level premiums and a death benefit that increases each year.

Term insurance offers tax benefits under the Income Tax Act, 1961. These benefits are available under sections 80C, 80D, and 10(10D) of the Act.

Section 80C

Under section 80C, you can claim a deduction of up to Rs. 1.5 lakhs on the premiums paid towards your term insurance plan. This section covers deductions for a range of investments, such as PPF, EPF, ULIP, and ELSS, as well as payments like children's tuition fees and home loan repayments.

Section 80D

Section 80D offers a deduction of up to Rs. 25,000 on premiums paid for term plans with a critical illness cover. This section typically deals with health insurance policies, but as many term insurance plans offer additional health cover, you can claim deductions under this section if you have opted for health-related riders.

Section 10(10D)

Under section 10(10D), the sum assured received on maturity or surrender of a policy, or upon the policyholder's death, is tax-free. This includes any bonuses received along with the sum assured.

It is important to note that the eligibility and applicability of these tax benefits depend on certain conditions specified under each section of the Income Tax Act.

Frequently asked questions