The smartest way to upgrade term insurance plans.
As you grow older, your life evolves - you get married, have children, buy a house etc., and in line with these changing times, you will also have higher financial responsibilities - providing for your family’s lifestyle, children’s education and higher education, home loan payments, weddings, celebrations and more.
If you are planning to purchase a term insurance policy (especially at an early age), you will need to upgrade the cover amount several times in your life, to provide sufficient cover for your family. In order to upgrade the cover, you will need to take a new policy for that additional amount - manually.
There are some drawbacks to this approach.
Firstly, you will have to go through all the documentation from filling up the form to medical tests - for every new policy you take. Secondly, if you get a medical condition or disease during these years, it is likely that the insurer will ask for an additional premium (this process is called loading), to cover the higher risk of your health. This means higher premiums. Finally, there is always the risk of the proposal getting rejected owing to higher age or poor health.
In addition to all these challenges you’ll face - your family will have their set of challenges to get multiple claims settled. They’ll need to go through the claim settlement process, submit documents and follow-up with the insurer separately for every policy you buy. In all, this is very complicated and doesn’t make sense. So, what can you do?
Enter, increasing covers.
As an alternative to manual upgrades, you could choose a feature called an increasing cover, while buying your term insurance policy.
As the name says, with this option - your cover amount gradually increases at regular intervals until it reaches a maximum limit. As you grow older, an increasing cover will automatically increase the amount of money your family can claim (in case of your death) - without you having to intervene every time. Increasing covers are a great way to match your cover against inflation.
If all other things remain the same, you can pick an increasing cover option, with 5% increase yearly - to match the same 5% inflation. The good thing is your premiums do not rise at par with inflation.
The following are some key features and benefits of getting an increasing cover.
- In most increasing cover options, you pay a uniform amount of premium throughout the term - but keep getting more cover on every renewal. (Exceptions are increasing covers offered by HDFC Life and PNB Metlife, where premium increases every year with the cover)
- The cover increase is automatic and doesn't need you to submit any new documentation, medical tests or declarations
- You do not face the risk of policy rejection due to older age or newly diagnosed illnesses
- Your family will have sufficient cover throughout the policy term, and won’t have to go through multiple claim settlement processes. (Read our article on: how to ensure a smooth claim settlement for your family)
In essence, increasing covers are the ‘power-up’ for your term insurance, giving it the super powers to overcome hurdles like inflation, rising expenses and new responsibilities - just like Mario below! 😉
How are increasing covers priced?
If you compare the initial premiums alone, you’ll notice that a regular, non-increasing cover has much cheaper premiums compared to those of an increasing cover.
However, if you purchase the policy early in life, you’re most likely to get the increasing cover for much lesser overall premiums paid. Let’s explain with an example.
These are the cover and premium options for the profile of a 30 year old male, non-smoker, cover upto age 65 years (Regular pay). Say -this person takes a cover of 1 Crore at the age 30. This cover is sufficient today considering all his family’s needs and his liabilities. But, he will need at least 2X in the next 10 years, given newer responsibilities, financial goals, liabilities that get added.
For the sake of simplicity, let’s compare these two scenarios
Scenario 1: He takes an increasing cover, with 10% cover increase per year.
Scenario 2: He makes a manual upgrade at age 40, when he buys a new policy for 1 more crore. In both cases, by age 40 he has a sufficient cover of 2 Crores. Here are the premiums he’ll pay throughout the term.
When you only compare the early premiums, increasing covers look expensive compared to regular covers. But, as you can see from the table above - when you add all premiums throughout the term, they offer great value.
In fact - we checked across multiple insurance plans, and observed that you can save 10-25% (after considering Net Present Value) of premiums over the term, by investing into an increasing cover. To top that off, the convenience that comes with a hassle-free cover increase is priceless.
What are the types of increasing covers available in the market?
You can choose from a variety of increasing cover options, based on a percentage increase, the maximum cover you’re aiming for, or an end-age. Different insurers offer different modes of increase.
Here are some important modes you should know of.
- Increase of 5% / 8% / 10% per year till your cover becomes 2x
- Increase of 5% / 10% every year till the end of your policy term
- Increase of 5% every year till you are 55 Years old
Are there any limitations on how much my cover can increase?
Yes, there is often a maximum limit on how much your increasing cover can grow upto. For example, the limit might be 2X your first cover amount. So, if you take a 1 Crore cover, and the maximum limit is 2X - then, by the end of the term your cover will increase to 2 crores and not more. You should be aware of this limit.
Some insurers offer increasing cover options where the cover increases until you become 55 years old or even till the end of the policy term. This means if you purchase such a policy at a younger age, the cover will increase far more than 2x for the same premium amount. Premium will be lesser at a young age, as well - so overall, you get an even better deal.
But, what about the Life-stage benefit argument?
You’ll have the option to sign up for a special type of benefit called - Life stage benefit, when you buy your term policy, by which you’ll be able to increase your cover amount at the time of life events such as marriage, childbirth etc..
However, while choosing this feature you should be aware of certain limitations and specific terms & conditions, insurers might impose. If you choose to take a life stage benefit, you will need to inform the insurer (within a set period of time after the life-stage has occurred) that you’d like to upgrade your cover amount, submit a few documents and the upgrade will be done.
Your premium amount will also be revised, and you should be super careful about this change.
Below is a comparison table between an Increasing cover, lifestage benefit and manual upgrade of a term insurance cover.
In all, you see that an increasing cover is an excellent option to ensure that your family always has sufficient cover, cost-effectively.
It is both cheaper and hassle-free, and we strongly recommend that you choose an increasing cover while purchasing your term insurance policy.
If you have any questions with respect to how to choose the right increasing cover for yourself, do post it on our forum and get expert responses within hours!
- You should use our term insurance calculator to know how much cover your family needs today.
- In addition to this, pick an increasing cover - to gradually reach 2X cover in the next 10 or 20 years.
- This will help your cover keep up with inflation, as well as cover any additional responsibilities or liabilities you get, after buying the policy
- Increasing covers are better than lifestage upgrade or manual upgrades both from a monetary standpoint, as well as from a convenience standpoint.
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