What Is Increasing Term Life Insurance & Who Should Buy It?

Increasing term life insurance is a type of life insurance policy offering a death benefit that grows over time, helping counteract the effects of inflation and rising expenses. It is advantageous for individuals and families anticipating higher costs in the future. Generally, premiums for increasing term policies are more expensive than those for level term policies with the same starting coverage amount.

• Increasing Term Life Insurance Definition
• How Increasing Term Life Insurance Works
• Pros and Cons of Increasing Term Life Insurance
• Who Should Buy Increasing Term Life Insurance
• How to Get an Increasing Term Life Insurance Policy
• Alternatives to Increasing Term Life Insurance
• FAQ About Increasing Term Life Insurance

Increasing term life insurance is a type of term life insurance that provides increasing death benefits over the policy’s duration. An increasing term life policy adjusts the death benefit periodically to match the policyholder's growing financial needs and hedge against inflation.

The main difference between increasing term insurance and standard level term life insurance lies in the adjustability of the death benefit. With increasing term life insurance, the death benefit grows at a predetermined rate, which could be structured as a percentage increase or a flat rate increase each year.

Increasing term life insurance and decreasing term life insurance serve different financial strategies based on the policyholder’s needs.

Increasing term life insurance enhances the death benefit over time. This type of policy ensures that the death benefit keeps pace with the policyholder’s increasing financial needs and the rising cost of living.

Decreasing term life insurance is the opposite — it reduces the death benefit over the policy term, typically aligned with the diminishing liability of a mortgage or other debts. This type of insurance is cost-effective for those who need to cover a debt that decreases over time, such as a home loan, and do not wish to leave a larger-than-necessary death benefit.

Increasing term life insurance operates via a simple mechanism: the death benefit, or the sum payable upon the policyholder's death, increases over time. This increase can be calculated either as a flat rate or a percentage of the original benefit amount at the start of the policy.

A flat rate increase means that the death benefit grows by a set amount each year. This method provides a predictable increase, simplifying financial planning for the future.

For a percentage-based increase, a typical arrangement might see the death benefit increase by a certain percentage annually. This type of increment helps increase life insurance coverage gradually, aligning more closely with the policyholder's anticipated increase in financial responsibilities.

The premiums for increasing term life insurance are structured to align with the growing death benefit over the policy’s term. Initially, these premiums may be lower compared to those for policies with a fixed benefit of similar value. Over time, as the risk to the insurer escalates due to the rising death benefit, the premiums may also increase to reflect this heightened risk.

Premium calculation for increasing term life insurance coverage depends on several factors, including the rate at which the death benefit increases — whether by a fixed amount or a percentage each year — and the terms of the policy itself. The longer the term and the higher the rate of increase in the death benefit, the more likely the policyholder will see their premiums rise over time.

Weighing the pros and cons of increasing term life insurance is necessary for individuals looking to tailor their life insurance to their evolving financial needs. This analysis helps ensure that the chosen insurance strategy aligns with both current and future financial goals.

Pros

• Adaptable Coverage: This insurance adjusts the death benefit over time, providing enhanced coverage as policyholders' financial responsibilities grow.
• Inflation Protection: The increasing death benefit is designed to protect against inflation, ensuring the policy's value keeps pace with the rising cost of living.
• Simplified Future Planning: Policyholders can secure higher coverage amounts for future needs without undergoing further life insurance medical exams or reapplication processes.
• Financial Security for Beneficiaries: As the benefit increases, it offers greater financial security for beneficiaries, covering more substantial future costs or debts.
• Tax Benefits: Like most life insurance, the benefits paid out are generally tax-free, providing an additional financial advantage.

Cons

• Higher Lifetime Cost: The premiums can increase over time, leading to higher overall costs compared to a level term life insurance policy.
• Potential for Overinsurance: There's a risk of overinsuring, as the increasing coverage might eventually surpass actual needs, leading to unnecessarily high premiums.
• Market Availability: These policies might not be as readily available as other types of term insurance, limiting consumers' options.
• Budgeting Challenges: As premiums increase, policyholders must ensure they can continuously afford the policy, which might be challenging during financial downturns.

By carefully considering these factors, individuals can make informed decisions about whether increasing term life insurance is the right choice for their long-term financial protection strategy.

Increasing term life insurance is suited for individuals and families whose financial responsibilities are expected to grow over time. This type of policy, which offers an increasing death benefit to protect against inflation, is particularly beneficial for several types of policyholders:

While increasing term life insurance offers valuable benefits for many, it may not be the best choice for everyone. Here are profiles of people who may not benefit from this type of insurance:

• Individuals Seeking Fixed Premiums: If you prefer stable, predictable premiums throughout the life of your policy, an increasing term life insurance policy may not suit your needs.
• Those with Declining Financial Responsibilities: Individuals whose financial obligations will decrease as they age, such as those nearing retirement or those paying down significant debts like a mortgage, may not benefit from an increasing term policy. Instead, they might opt for decreasing term life insurance, which reduces the death benefit over time as financial responsibilities diminish.
• Older Individuals with Limited Future Financial Growth: Seniors or individuals who do not anticipate their financial needs growing significantly over time might find increasing term insurance unnecessary. The higher premiums may not provide enough added value, especially if they don’t expect to need substantially more coverage in the future.
• Budget-Conscious Consumers: If keeping costs low is your primary concern, the rising premiums associated with an increasing term life policy might be impractical. A level term life insurance policy or other more affordable options might better suit your financial goals.
• Short-Term Policyholders: Those who only need life insurance for a short period, such as ten years or less, may not see the full benefits of a long-term increasing term life insurance strategy, as the death benefit growth happens gradually over time.

If increasing term life insurance doesn't fit your needs, several alternatives may provide more suitable coverage based on your financial goals and situation. Here are a few commonly considered options:

• Level Term Life Insurance: This is a more straightforward option compared to increasing term insurance. With a level term policy, the death benefit remains constant throughout the life of the policy, and premiums remain stable. This is ideal for individuals who want predictable costs and coverage without worrying about premium increases or changing benefits. It’s best suited for those whose financial responsibilities are expected to remain steady over time.
• Decreasing Term Life Insurance: This policy operates in the opposite manner to increasing term life insurance. The death benefit decreases over time, often in alignment with a mortgage or other declining debts. Premiums remain lower compared to increasing or level term policies, making this an affordable choice for individuals whose financial obligations shrink as the policy term progresses. It’s especially popular among homeowners seeking coverage that decreases as they pay down their mortgage.
• Whole Life Insurance: For those looking for lifelong coverage with additional benefits, whole life insurance offers a fixed death benefit along with a cash value component that grows over time. Premiums are generally higher, but this policy offers the security of permanent coverage and an investment element, as the cash value accumulates and can be borrowed against or cashed out.
• Universal Life Insurance: Like whole life, this is a permanent policy but with more flexibility. Policyholders can adjust both premiums and death benefits as their financial situation changes. Universal life insurance also builds cash value but allows for more adaptability than the structured nature of whole life policies.
• Convertible Term Life Insurance: If you're uncertain whether you need permanent life insurance now but may in the future, a convertible life insurance policy could be a viable option. It allows you to convert your term life insurance into a permanent policy without undergoing additional medical underwriting.

Increasing term life insurance is an option designed to adjust your coverage over time. MoneyGeek answers the commonly asked questions to help you understand how this type of insurance works and how it may fit your needs.