What is increasing term life insurance?
Increasing term life insurance is a type of insurance where you can increase your death benefit over time without new underwriting. This kind of life insurance is relatively rare.
The most popular form of term life policy is level term insurance, where the premium and the death benefit remain fixed throughout the term. However, some people buy increasing term life insurance because they anticipate needing more life insurance in the future. For example, you might purchase this kind of policy if you expect to earn a higher salary, plan to start a family, anticipate more financial responsibilities in the future, or are worried that inflation will erode your death benefit’s value.
Some increasing term life policies offer fixed premiums, but many increase premiums as the death benefit increases. If your premiums are fixed, they’ll typically be higher than level term insurance premiums.
Depending on the insurer, your death benefit may increase by a lump sum or a specified percentage each year. Some policies may allow for incremental increases on a different schedule. Your insurer may limit coverage increases to the early years of the policy, such as the first five years. In that event, your coverage will continue for the length of the policy’s term, but you won’t be able to automatically step up the death benefit.
Increasing vs. decreasing term life insurance
In contrast, some people buy decreasing term life insurance, which is the opposite of increasing term life insurance. Over time, the death benefit on a decreasing term policy becomes smaller. This coverage is usually cheaper than increasing term life insurance or level term insurance because the death benefit gradually shrinks. The premiums generally are level, so you are paying the same amount for less coverage over time.
People sometimes buy mortgage protection insurance, a form of decreasing term life insurance, to pay off the balance of their home loan if they die.
Alternatives to increasing term life insurance
If you expect your life insurance needs will go up over time, an increasing term life insurance policy isn’t the only option. Here are some alternatives to consider.
Guaranteed insurability rider: This life insurance rider allows you to increase coverage periodically without a new medical exam or underwriting. You’ll pay higher premiums if you choose to step up the death benefit. A guaranteed insurability rider is relatively uncommon on term life insurance policies.
Cost-of-living rider: A cost-of-living rider allows you to increase the death benefit to keep pace with inflation.
Purchase additional term coverage: Another option is to purchase a new term life policy as your coverage needs increase. The downside is that you’ll need to undergo new life insurance underwriting. Also, even if you’re healthy, life insurance is more expensive as you age, so premiums will likely be higher.
