One of the most critical decisions in buying term insurance is deciding your sum assured. Yet, how do you put a value on a life? It’s not just about a number—it’s about securing your family’s financial future, ensuring they can sustain their lifestyle, pay off liabilities, and achieve their dreams even in your absence.
But here’s where it gets tricky. The sum assured in term insurance cannot be boosted frequently. So, should you lock in a high sum assured from the start or opt for an increasing term insurance plan, where the coverage grows over time? Something else to remember is that the sum assured cannot be changed frequently. The latter may seem like a smart way to keep up with inflation and rising financial responsibilities. But does it work in your favor?
In this article, we’ll explain how increasing term insurance works, how insurers structure it, its pros and cons, and why a fixed-cover term plan might be the better choice.
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What is increasing term insurance?
Increasing term insurance is a term life insurance where the sum assured increases by a fixed percentage over the policy term at regular intervals. In contrast, a traditional term plan offers constant coverage throughout the policy's duration.
For example, let’s say you purchase an increasing term insurance plan with a ₹1 crore sum assured and a 10% annual increase. Here’s how your cover would change over the years:
| Year End | Sum Assured |
|---|---|
| After Year 1 | ₹1.1 crore |
| After Year 2 | ₹1.2 crore |
| After Year 3 | 1.3 crore |
| After Year 4 | ₹1.4 crore |
| After Year 5 | ₹1.5 crore |
| After Year 6 | ₹1.6 crore |
| After Year 7 | ₹1.7 crore |
| After Year 8 | ₹1.8 lakh |
| After Year 9 | ₹1.9 lakh |
| After Year 10 | ₹2 crore |
However, the sum assured does not increase indefinitely. Most insurers cap the maximum coverage at a set amount, typically 200% of the original sum assured. So, if you start with a ₹1 crore cover, your policy might stop increasing once it reaches ₹2 crore.
Now, here’s something important to note—the premiums remain fixed throughout the policy term. So, the premium you pay for a policy at age 30 will be the same premium you pay at age 60 unless the policy terms have undergone some change. However, the premiums for increasing term insurance are typically priced somewhere between the cost of your initial and eventual cover. This means you start off paying more than a standard ₹1 crore term plan but less than what a ₹2 crore plan would cost from day one.
At first glance, this structure seems beneficial—you get increasing coverage without rising premiums. But does that make it the best option? Let’s explore further.
How do insurers increase term cover?
Not all increasing term insurance plans follow the same pattern. Insurers typically offer two ways of increasing coverage:
1. Annual Increase (Per Year)
In this structure, your sum assured increases by a fixed percentage every year—usually 5% or 10% of the original sum assured. This structure ensures that your coverage grows steadily. However, the major drawback is that the increased coverage comes with higher premiums from the very beginning because insurers factor in the future growth of the sum assured when calculating the premium. This makes it more expensive than a traditional term plan.
2. Increase at Fixed Intervals
Instead of increasing coverage annually, some policies use a step-up approach, where the sum assured increases once every 5 or 10 years instead of every year.
Example: 10% Increase Every 5 Years
- Year 1: ₹1 crore
- Year 5: ₹1.1 crore (₹1 crore + 10% of ₹1 crore)
- Year 10: ₹1.2 crore (₹1.1 crore+ 10% of ₹1 crore)
- Year 15: ₹1.3 crore (₹1.2 crore + 10% of ₹1 crore)
This approach can be helpful if you anticipate primary financial responsibilities increasing at specific stages—like home loans, children's education, or lifestyle inflation. However, just like the annual increase model, this too comes with higher premiums from the beginning because insurers consider the eventual higher cover. Moreover, it delays the complete financial protection in the early years.
What are the features of increasing term insurance?
While increasing term insurance might seem attractive, it comes with unique features that may not always work in your favor.
1. Lower Cover Eligibility in the Beginning
One of the most significant drawbacks of increasing term insurance is starting with a lower sum assured in the early years. Therefore, if something unfortunate happens in the first few years before your coverage is boosted, your family might not get adequate financial protection. On the other hand, a regular term plan gives you full coverage from day one.
For example, if you’re eligible for a ₹1 crore cover but opt for an increasing term plan starting at ₹50 lakh, you leave your family underinsured in the initial years. You can use this calculator to calculate how much-fixed coverage you require to prevent this.
2. Higher Premiums
Increasing term insurance is significantly more expensive than a fixed-cover term plan because of two reasons. Firstly, insurers factor in the growing sum assured over time, making the policy costlier. Second, even though the coverage increases gradually, you start paying higher premiums right from the beginning because the higher coverage is taken into account from the very beginning.
Let’s compare the two term insurance plans from HDFC Life (Click 2 Protect Super plan) for two profiles:
Profile 1: 25-year-old female who is a non-smoker and has taken the policy till 60.
| Type of Plan | Sum Assured in Year 1 | Final Sum Assured | Annual Premium |
|---|---|---|---|
| Fixed Cover Term Plan | ₹1 crore | ₹1 crore | ₹10,060 |
| Increasing Term Plan (10% yearly increase) | ₹1 crore | ₹2 crore | ₹14,276 |
| Fixed Cover Term Plan | 2 crore | 2 crore | ₹16,945 |
Profile 2: 35-year-old male who is a non-smoker and has taken the policy till 60 years of age.
| Type of Plan | Sum Assured in Year 1 | Final Sum Assured | Annual Premium |
|---|---|---|---|
| Fixed Cover Term Plan | ₹1 crore | ₹1 crore | ₹16,599 |
| Increasing Term Plan (10% yearly increase) | ₹1 crore | ₹2 crore | ₹23,890 |
| Fixed Cover Term Plan | 2 crore | 2 crore | ₹28,680 |
Note: Mentioned premiums include a 5% digital discount for the first year.
In most cases, you end up paying more for an increasing term plan despite getting the same coverage later on. On the flip side, by paying slightly more, as is clear from the above tables, you can ensure a 2 crore cover from the get-go, thereby providing better coverage to the dependent during the initial years when they need it the most.
3. Higher Eventual Cover
Increasing term plans offer a higher cover in the later years, but the question is—do you need it? If you plan your finances well, your liabilities, such as home loans, will reduce over time, and your income will likely grow, making it easier to manage financial risks. Additionally, investing in an investment plan, like mutual funds or stocks, is a better way to maximize your returns. In increasing term insurance, by the time your sum assured increases significantly, your family’s dependence on insurance might decrease, as they would have built their financial stability.
This is why term insurance is best purchased early in life and only needs to cover you until retirement age plus about five years (depending on your dependents). Buying early ensures lower premiums, as rates increase with age. Beyond retirement, your income stops, but ideally, you should have enough savings and investments to support your spouse or dependents without relying on insurance.
Whole life insurance, on the other hand, is often not recommended because it combines insurance with investment but offers lower returns compared to dedicated investment options like mutual funds or stocks. The premiums are significantly higher, and most people don’t need life cover for their entire lifetime—just until their financial responsibilities are taken care of.
This makes a fixed-cover term plan a more practical choice, ensuring sufficient protection when it matters most without unnecessary premium costs. A fixed cover term plan at your maximum eligibility protects you from the start without the added complexity.
What are the Best Term Insurers for Increasing Term Insurance Plans?
When it comes to increasing term insurance, a certain insurance provider comes to mind:
HDFC Life - HDFC Life’s Click 2 Protect Super offers 5% (each year) and 10% (every 5 years) increasing term options. Add to this HDFC’s credibility over its Claim Settlement Ratio, Amount Settlement Ratio, and complaint volume, and you have an excellent pick for a term insurer.
The plan comes in three variants—Life, Life Plus, and Life Goal—offering coverage from ₹50 lakh onwards with flexible payout options. Key riders include Waiver of Premium, Return of Premium (ROP), Accidental Death Benefit, and Critical Illness cover. Unique features include a life stage option to increase coverage, a renewability option at maturity, premium frequency adjustments, and the ability to switch to limited pay. While comprehensive, the policy is costlier than competitors. However, HDFC Life’s reliability and extensive coverage make it a solid choice for those prioritizing financial security.
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Conclusion
Choosing the right term insurance plan involves aligning it with your long-term financial needs. While increasing term insurance might seem flexible, it comes with higher premiums and delayed full coverage. A well-planned fixed-cover term plan often provides better financial security when your family needs it the most, i.e., in the initial years. Understanding how your liabilities and income evolve can help you make a more informed decision about the coverage that genuinely benefits your loved ones.
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