Ch. 20: Increasing Cover

You buy a term insurance policy after making a detailed calculation of the amount of money your family will need. The cover is also restricted to your income at the time of buying the policy. But, do you think this amount will be sufficient for a lifetime? Especially when you purchase a term insurance policy at a younger age?

As you grow old, your financial responsibilities will keep on increasing. You’ll get married, have children, buy a house, you’ll have to pay for your children’s education, marriage, etc. To meet these increasing responsibilities, you'll need to upgrade your term cover several times - so that your family is adequately covered at all times.

Now, none of the term insurance policies that exist today in the market can be upgraded to match your new lifestyle or expenses. Yes, the lifestage benefit does exist - but it comes with its own limitations.

So how do you upgrade your term insurance cover in the most optimal manner? What are your options?

Let’s find out!

Option 1 - You can buy a new policy when you need an upgrade..

One way to upgrade your term insurance cover is by buying a new policy altogether. There might, however, be some drawbacks to this approach.

• You’ll have to go through the entire documentation process again and undergo new medical tests.
• There are chances of your upgrade being rejected due to age or health-related reasons.
• You’ll have to manage multiple policies and your family, too, will have to go through the hassles of claiming from multiple policies.

For instance, Ayesha has bought a term insurance plan with a cover amount of Rs. 50 Lakhs at the age of 25. Now, after, say, 10 years, she wants to increase her cover to Rs. 1 Crore. So, she buys a new policy with a sum assured of Rs. 50 Lakhs at the age of 35. This is known as a manual upgrade.

When Ayesha buys the new term plan, she’ll have to go through the paperwork, undergo new medical tests, etc. And in case she passes away while her plan is active, her family will have to apply for the claim twice. They may have to submit two sets of documents and follow up with the insurers multiple times to get their claim settled.

Option 2 - You can choose the Increasing Cover option.

If you buy term insurance with the increasing cover feature, all these complexities can be avoided.

Just like the name suggests, under increasing cover, your term insurance cover will keep on increasing gradually - until it reaches a maximum limit.

Let’s understand how increasing cover works, with the help of Michael’s example.

Michael is 25 years old when he buys a term plan with a cover amount of Rs. 1 Crore. He opts for the increasing cover feature, where his cover will keep on increasing automatically by 10% every year - until a maximum increase of 2X the base cover. And, his cover will start increasing after the 5th policy year.

Let’s understand how his cover will increase with the help of the below table.

So, after the 15th policy year, there will be no further increment in the sum assured. Because the maximum allowed increase is up to Rs 2 Crores (2X the base cover amount).

• Uniform premiums
  Even though your term insurance cover amount will keep on increasing with time, your premiums will remain the same throughout.


• No additional documentation or medical tests
  If you choose the increasing cover feature, your term insurance will keep on upgrading automatically. You won’t need to submit any new documents, sign new declarations, or undergo additional medical checkups.


• No risk of rejection
  In manual upgrades, there is a risk of your proposal getting rejected due to older age or newly diagnosed diseases. However, with increasing cover, you won’t have to worry about your policy getting rejected due to higher age or poor health.


• Helps beat inflation
  Buying a term insurance plan with the increasing cover feature can also help you beat inflation - which rises gradually every year.


• Single policy to manage
  If you opt for the increasing cover feature, you won’t have to keep buying additional policies to increase the overall sum assured. So, you'll have to manage and pay premiums for one policy only.


• Single claim settlement process
  Your family, too, will have to go through only one claim settlement procedure.

• Cover doesn’t increase immediately
  When you opt for the increasing cover feature, your cover amount will start increasing after a specific number of years, like 1 year, 5 years, and so on. It won’t start increasing immediately.


• Premiums can be expensive
  The premiums of a term plan with increasing cover might be higher when compared to a regular term plan (without increasing cover). However, when you evaluate the premiums you pay throughout the term and calculate their Net Present Value, you’ll see that term plans with increasing cover are truly cost-effective.


• Maximum increase limit
  Insurance companies will put a limit on the amount up to which your term insurance cover amount can grow. This limit can either be -
  
  • Multiple of the base cover.
    Under this option, your cover will increase by 5% / 8% / 10% every year till it becomes 2X.
    
    For instance, Stefan, 25 years old, buys a term insurance with a sum assured of Rs. 1 Crore. He buys the policy for a duration of 50 years. He opts for the increasing cover feature, where his cover amount will
    
    increase by 10% every year after his policy completes 10 years. The cover will increase until it reaches a maximum limit of 2X his base cover.
    
    So, after the 10th policy year, his sum assured will increase by 10% every year. In the 11th policy year, it will increase to Rs. 1.1 Crores, in year 12, it will increase to Rs. 1.2 Crores, and so on. His cover amount will keep on increasing until it reaches the limit of Rs. 2 Crores (2X base cover).
  
  
  • Fixed percentage up to the end of the policy term.
    Here, your sum assured will rise by 5% / 10% every year till the end of the policy tenure.
    
    For instance, Nina, 30, buys a term insurance with the increasing cover feature. She buys the plan for a period of 40 years, and chooses a sum assured of Rs. 1 Crore. As per the policy terms, after the 5th policy year, her sum assured will increase by 10% every year throughout the policy term.
    
    Meaning, her cover will increase to Rs. 1.1 Crores in the 6th policy year. In the 7th policy year, it will rise to Rs. 1.2 Crores. In the 8th year, it will increase to Rs. 1.3 Crores. It will keep on increasing by 10% annually throughout the policy term of 50 years.
  
  
  • Fixed percentage up to a certain age.
    Here, your term cover will increase by 5% every year until you're 55 years.
    
    For instance, Ian buys a term insurance plan at the age of 30. He chooses the sum assured of Rs. 1 Crore, and a policy tenure of 40 years. He also chooses the increasing cover option, where his cover will increase by 5% annually until he becomes 55 years old. His cover will start increasing after his policy completes 5 years.
    
    So, in the 6th policy year, his cover will rise to Rs. 1.05 Crores. In the 7th policy year, it will increase to Rs. 1.1 Crores. His cover will keep on rising by 5% every year till Ian reaches the age of 55.

This is all about the increasing cover option in term insurance. Hope this article helped you gain enough clarity on how increasing cover works, and how it can help ensure your family is covered sufficiently throughout the policy tenure.