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Life insurance is one of the most valuable investments you can make—not just for yourself, but also for your family and loved ones. It serves as a safety net that ensures your family has adequate financial support if you pass away. Of course, nobody ever wants to think about death, but having a life insurance policy prepares you for unexpected events.

If you’re new to life insurance, feeling overwhelmed with all the policy options is understandable. Generally, term life insurance can be a good starting point if you don’t have anything specific in mind. It’s simple, straightforward, and an affordable way to protect your loved ones financially.

This guide will expound on term life insurance, discuss how it works, and explain which component increases in the increasing term insurance. This way, you’ll better understand how the policy works and can make more informed decisions.

Understanding Term Life Insurance

To start, what is term life insurance? As its name suggests, term life insurance is a policy that provides coverage for a set duration or term, such as 10, 15, or 20 years. If the insured dies during the specified term, the insurance company will pay a cash benefit to the policy’s beneficiaries.

Once your policy expires, you may be able to renew it for another term, but you’ll likely need to pay higher premiums upon renewal. Some insurance companies may also give you the option to convert your policy to permanent life insurance, but this will be more expensive.

How does term life insurance work?

If you’re familiar with car or homeowner’s insurance, term life insurance works similarly to these policies. You pay premiums regularly within the agreed policy length. Your insurance company will pay your beneficiaries the tax-free death benefit in cash if you pass away during the contract period.

Your premiums depend on age, gender, health, coverage amount, and policy length. Insurance companies usually perform an underwriting process to assess your risk level when applying for a policy. It may include asking for a medical exam and inquiring about your driving record, occupation, hobbies, and other things.

How is term life insurance different from whole life insurance?

The two policies differ in the following aspects:

  • Policy Length. Term life insurance only covers a specific period, whereas whole life insurance is permanent. In short, the former expires after the term passes, while the latter lasts for life, so it won’t expire as long as you keep paying your premiums.
  • Cost of Premiums. Term life insurance is significantly cheaper and more affordable than whole life insurance. You usually have to pay more for less coverage with whole life insurance, but the main trade-off is having lifelong coverage.
  • Cash Value. One unique feature of whole life insurance is the cash value component. Every time you pay your premium, part of it is added to your cash value, which grows over time. It makes the policy a great investment vehicle.

Increasing Term Life Insurance

Term life insurance can be broken down into different types depending on the premiums and cash payouts. However, most policies tend to be level term, which means you pay the same premiums regularly and your death benefit stays constant.

However, another option you can explore is increasing your term life insurance. Based on its name, you might wonder which component increases in the increasing term insurance. Essentially, the death benefit increases with this policy. Thus, it’s a great option for those who want to grow their coverage over time.

Premiums may fluctuate based on the insurance company, but they’re generally higher than with level policies to compensate for the larger payout.

How does increasing term life insurance work?

Increasing term insurance generally works the same, where you pay premiums and decide on the face value upon purchasing the policy. Then, your insurance company will calculate the sum assured, which refers to the death benefit’s rate of increase per year.

The sum assured can be in the form of a percentage or flat rate. To illustrate, here are some examples: 

  • By Percentage. Say, for example, you buy a $100,000 policy with a 5% increase per year. So at the end of a 20-year term, your death benefit will grow to $265,329.77.
  • By Flat Rate. Assume the same example where you have a $100,000 policy, but instead, the sum assured is $25,000 every four years. In this case, your death benefit will be at $225,000 after 20 years.

With increasing term insurance, you pay slightly higher premiums but grow your death benefit over time. The increase may be in a percentage or flat rate, but the bottom line is that the cash payout will turn out higher than your policy’s initial value by the end of the term.

Some companies may also impose a maximum limit. If this is the case, your death benefit stops growing after it reaches the limit, but your policy remains intact. Given these technicalities, it’s important to thoroughly discuss the specifics with your insurance company before deciding what policy will work best for you.

Benefits of Increasing Term Insurance

Given that most term insurance policies are level for simplicity, you might be wondering why some opt for increasing term insurance. Here are some of their main benefits:

  • Covers Increasing Costs. Expenses usually increase as you get older. For example, you might be planning to buy a house or start a family. In such cases, increasing term policies can help cover the rising costs.
  • Hedges Against Inflation. Another major benefit of this policy is that it can combat the effects of inflation. By gradually increasing your death benefit, you’re sure that the payout will remain as valuable as it was many years later.
  • It is Affordable. While term insurance premiums are slightly higher, they’re still much more affordable than whole life insurance. Thus, the policy can be a good alternative to accumulating a higher death benefit without the huge financial burden.
  • No Additional Underwriting. With a term insurance policy, you can increase your coverage without re-applying with your insurance company. You’d need to go through the underwriting process again for standard policies to get a higher coverage policy.

Using Riders in Increasing Term Insurance

Riders are usually available as add-ons to life insurance policies, including increasing term insurance. If you’re interested in enhancing your coverage, here are some options you can explore:

Term Conversion Insurance Rider

This rider allows you to convert your term insurance policy into whole life insurance once the term expires. So, while you need to pay more for permanent insurance, you can avoid the extra cost of re-applying for a policy. You also won’t be required to take a new medical exam, so advanced age or health issues won’t be considered in your premiums.

Accidental Death Benefit

If the policyholder dies from a covered accident, this rider provides a higher cash payout or death benefit. In most cases, the additional payment is equal to your policy’s face value, effectively doubling the benefit.

Return of Premium

This rider allows you to refund all the premiums paid on a term insurance policy if the insurer doesn’t pass away during the specified term. However, the add-on comes at a high cost, so it’s important to assess your finances to see if it’s worth it. Some may prefer to invest the additional amount elsewhere, so consider your position before getting the rider.  

Bottom Line

Overall, term life insurance is a simple and affordable life insurance policy that can provide a safety net for finances by replacing income, paying off mortgages, or sending children to college.

Term insurance is an affordable life insurance policy that provides coverage for a specified term. While most offer a level term policy, you can also get an increasing term policy. So, which component increases in the increasing term insurance? It is essentially the death benefit, which increases over time to help cover rising expenses and protect against inflation. So, while it’s more expensive than level term insurance, it’s still more affordable than whole life insurance.

There are several types of term insurance policies you can get, one of which is increasing term insurance. Under this policy, you pay slightly higher premiums but grow your death benefit over time. The increase may be in a percentage or flat rate, but the bottom line is that the cash payout will turn out higher than your policy’s initial value by the end of the term.


Sherilyn Lauren

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