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Increasing term insurance is usually used when individual needs potential payouts to increase over time. This life insurance type offers constantly increasing death benefit. This benefit can be linked to Consumer Price Index (CPI) or inflation. There is also a possibility to make potential payout higher by a certain percentage each year. This type of insurance is not used as often as level or decreasing term life insurance because it requires the person to pay higher premium over time. However, increasing term life insurance can be a very beneficial option in certain circumstances.
The main advantage of the increasing term life insurance policy is that it allows people to buy a guaranteed ability to raise the coverage in the future. It is usual that when a young person decides to buy life insurance contract he does not have enough money to buy sufficient cover and as a result buys a contract that does not offer adequate death benefit. However, as years go by the person ages, his health condition worsens and as a result the person is not able to increase his life insurance coverage. If a young person decided to buy increasing term life insurance, he would have been able to pay the affordable premiums and get constantly increasing cover. A very simple example can be taken. For instance, a person can choose to buy increasing term life insurance that offers a cover of £100,000 during the first 5 years of the contract. After 5 years the cover increases and for the next 5 years the death benefit equals £250,000. During another 10 years the cover increases once more and reaches £500,000. As a result, 10 years after the contract was signed the person has a sufficient death benefit and does not have to worry whether the benefit will be enough to support his family.
Another advantage of term life insurance is that it is a good way to protect the savings from the inflation. It is extremely important when the term of the insurance is long. For instance, 20 years or longer. Because of inflation, the money depreciates every year. Inflation is a good thing because it stimulates the growth of the economy and is one of the main engines of the growth of consumption. Inflation up to 5 % percent is considered to be normal. For example, a person signed level term life insurance contract for 20 years. The amount of coverage is £250,000. If the inflation is 3% every year, after 20 years the amount of coverage is only a bit larger than £85,000.
What is more, as the time passes by the living standard of the family may also increase. Young people graduate and make career. As a result, they earn more and are able to spend more for their needs. Increasing standard of living together with inflation can make a cover that once was sufficient inadequate. However, with increasing term life insurance these two problems can be easily solved.
Last but not least advantage is that although the premiums increase over time they are still calculated using current facts of health and special risks. If in the future the health of the person deteriorates, he will still pay the premiums that were calculated when the person had no medical problems.
The biggest problem of the increasing term life insurance is that before the purchase of this life insurance an assumption is made that the need of insurance cover is much smaller today than it would be in the future. However, most people buy life insurance coverage only when they face big responsibilities such as the birth of the baby or the issuance of the mortgage. As a result, when responsibilities start from the first day the person that took increasing term life insurance still faces risk during the first years of the policy.
Another drawback of this kind of life insurance policy is that only temporal protection is chosen. These policies do not have maturity value and if a person survives the period of life insurance he will not be refunded the premiums.
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There are two types of increasing term life insurance: traditional and index-linked. Traditional increasing term life insurance is designed in a way that the sum assured increases on a specified rate. The increase is made on every anniversary of the policy. The anniversaries can be as often as every 5 years or more frequent. Other traditional increasing term life insurance policies add a fixed sum to the existing death benefit. Index-linked life insurance is very similar to traditional increasing term life insurance. The only difference is that the death benefit is increased using the rate that is tied to a certain index. This index can be the growth rate of GDP or UK Retail Price Index. In this case the insurance is sold in units and the increase is applied to every unit.
Insurance companies use different statistics in order to calculate the premiums for increasing term life insurance. However, the calculation process is usually the same. The insurance carrier break down the risk and use the rates from different term life insurance policies. The same example as the one mentioned above can be taken into consideration. The cover is increases twice: from £100,000 to £250,000 and from £250,000 to £500,000. In order to calculate the premiums insurance company will use the rates from three separate term life insurance policies: £100,000 based on today’s age of the person for 5 upcoming years, £250,000 based on the age of the individual 5 years from now for 5 years term and so on. After separate rates are collected the company adds these rates together and attaches a variance. The variance is used in order to accommodate the actual claim experience that increasing term life insurance contract.