A Primer on Increasing Term Life Insurance

Life insurance can give older adults the peace of mind of knowing their families will be protected financially if they die. But with so many types of policies available, choosing a suitable plan can be challenging. Keep reading to learn the basics of one popular option: increasing term life insurance.

What Is Increasing Term Life Insurance?

Term life insurance policies provide coverage for a predefined period of time that typically ranges from 10 to 30 years. Although most plans offer level-term benefits so that premiums and payouts remain the same over the policy's duration, increasing term life insurance provides an alternative for families with specific needs.

Like other term policies, increasing term life insurance provides coverage for a predefined time period, but the death benefit incrementally increases in value over the plan’s life. Depending on the policy, premium rates may also rise throughout the policy's life span.

How Is Increasing Term Life Insurance Calculated?

Increasing term life insurance policies rise in value incrementally each year based on a fixed percentage that typically ranges between 2% and 10%. The increase is usually calculated using a simple rate and it's dependent on the original payout value and the contracted percentage, as illustrated in the following example:

For a $200,000 policy with a 10% yearly increase:

• Year 1 value: $200,000
• Year 2 value: $210,000
• Year 3 value: $231,000
• Year 4 value: $254,100
• Year 5 value: $279,510

It’s important to note that policies may differ, and some plans calculate yearly increases using a compound rate.

What Are the Pros and Cons of Increasing Term Life Insurance?

Increasing term life insurance has benefits and drawbacks. If you're considering an increasing term life insurance policy, you may want to weigh the following pros and cons before purchasing a policy:  

Pros

• Yearly increases compensate for inflation.
• Increases may accommodate the changing financial needs of many families.
• You can increase coverage without having to reapply.
• Policies are typically less costly than permanent life insurance.

Cons

• Because increasing term life insurance policies can increase rapidly in value, premiums may become prohibitive in plans without fixed payments.
• For plans without fixed payments, policies may diminish in value when factoring in higher premiums. 

What Riders Are Available With Increasing Term Life Policies?

Optional riders may be available when purchasing an increasing term policy. These add-ons offer additional protection to policyholders and may include the following options: 

• Disability premium waivers waive premium payments if the policyholder becomes disabled for an extended period of time, as set by the policy
• Accidental death and disability riders offer additional payouts to policyholders who experience these events
• Critical illness riders offer additional payouts to policyholders diagnosed with a covered illness

Are Increasing Term Life Insurance Policies Convertible?

Many term life insurance policies can be converted to permanent life insurance, although guidelines may vary by plan and carrier. Some policies require the conversion to be carried out prior to the policyholder’s 70th birthday, while other carriers prevent conversions during the initial year of coverage. Policyholders with universal life insurance can often switch freely between level and increasing benefit options. It’s advisable to consult your insurance agent or a representative from the carrier for information about your individual policy. 

Can You Increase Your Term Life Insurance?

The ability to increase your term life insurance coverage depends on your policy. Some plans provide options to increase the payout sum following life events such as marriage or childbirth.

Do Increasing Term Life Insurance Premiums Go Up With Age?

Yes. Most increasing term life insurance premiums are impacted by the age of the purchaser. Policy premiums may increase by as much as 10% for each year of age, although other factors may impact the price, including:

• Gender
• General health and preexisting conditions
• Family history
• Occupation and high-risk hobbies
• Weight and smoking status 

Is It Better to Get 20 or 30-Year Term Life Insurance?

The answer depends on your priorities. Term life insurance policies are typically available in five-year increments, with most carriers offering 10, 15, 20 and 30-year options. Because policy length directly affects the price, longer-term coverage costs more than short-term plans, while shorter plans are more cost-effective and usually fit easily into policyholders’ budgets.

Who Benefits From Shorter Plans?

Individuals who may benefit from 20-year plans or shorter include:

• Parents looking to provide for their children until they reach college age
• Caregivers who provide financial support for aging parents
• Individuals approaching retirement whose spouses will receive pension death benefits if they pass away
• Homeowners with partially paid-down mortgages

Who Benefits From Longer Plans?

Individuals who may benefit from 30-year plans include:

• Newlyweds
• Couples with significant long-term debt
• New homeowners with 30-year mortgages
• Breadwinners with family members who rely on their income
• Parents with special needs children who may require lifelong care.

What Should You Consider When Purchasing a Policy?

To secure adequate protection for your family, the coverage you purchase should reflect your unique financial and lifestyle needs.

You should consider these two major factors when selecting coverage:

1. Amount of Coverage

The coverage amount should reflect your immediate and future needs. Take into account the following aspects of your financial picture when deciding on the coverage amount:

• Budget: Missed payments may result in policy termination, so the plan premium should fit comfortably into your budget.
• Income-to-expense breakdown: To secure adequate coverage, consider what expenses your family would need to cover in the event of your death, including mortgage payments, credit card debt and the costs of daily living.
• Future goals: Future plans are especially important for families with children, and may include expenses such as college tuition.

The DIME Method

The DIME method is a simple way of calculating the amount of insurance you'll need. DIME stands for:

• Debt
• Income
• Mortgage
• Education

By adding up your monetary obligations in these categories, you can roughly gauge the minimum coverage required to meet your family’s financial needs. Remember to account for needs such as funeral expenses, along with future considerations such as long-term income replacement.

2. Length of Coverage

The policy duration should reflect the length of your outstanding debts and other long-term financial obligations. For example, if you have 15 years left on your mortgage, you'll need to maintain coverage for at least 15 years. If you have children, the policy should last at least until the youngest reaches adulthood.

It's crucial to purchase a policy of sufficient length right at the outset. Adding coverage later may be cost-prohibitive. Even worse, you may find you no longer qualify for a policy. In fact, according to the Insurance Information Institute, most carriers won't insure individuals beyond their 80th birthday.

Working With a Financial Advisor

When shopping for life insurance, it may be helpful to consult a financial advisor or experienced insurance agent. These industry professionals can help you determine how much coverage you need and the best type of life insurance to safeguard your family's financial future.