If you’re looking for a life insurance policy that allows you to add more coverage over time, there are options. You might be able to tack on a policy add-on that lets you increase the death benefit as your needs change, or you could buy a standalone policy with that feature built in. This is called increasing term life insurance.
What is increasing term life insurance?
Increasing term life insurance is a type of policy where the death benefit increases over time without taking a medical exam. This kind of life insurance is somewhat rare.
The most popular form of a term life policy is level term insurance, where the premium and the death benefit stay the same. However, some people buy increasing term life insurance because they expect to need more life insurance in the future.
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Who is increasing term life insurance best for?
You might buy this kind of policy if you expect to earn a higher salary, start a family or have more financial obligations in the future. This type of insurance could also be helpful if you're worried that inflation will erode your death benefit’s value.
While building up your policy’s death benefit over time might seem helpful, you’ll also have to account for rising insurance costs in your budget. The premiums for these term life policies usually increase as the death benefit grows. If your premiums are fixed, they’ll likely be higher than level term insurance premiums.
How does increasing term life insurance work?
Depending on the insurer, the death benefit on your increasing term policy might get a boost through a lump sum or a specified percentage each year. Some policies might 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.
If you have a $100,000 increasing term life insurance policy, here’s an example of how your death benefit would change over time depending on which method is used.
Flat rate option ($5,000 per year) | Percentage option (5% per year) | |
|---|---|---|
Year 1 | $105,000 | $105,000 |
Year 5 | $125,000 | $127,628 |
Year 10 | $150,000 | $162,889 |
Pros and cons of increasing term life insurance
Pros
Death benefit increases over time.
More coverage without a medical exam.
Accounts for inflation.
Cons
Premiums increase as coverage increases.
There may be death benefit caps.
Increasing vs. decreasing term life insurance
Decreasing term life insurance 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 or level term insurance because the death benefit shrinks. The premiums are level, so you are paying the same amount for less coverage over time.
The most common type of decreasing term life insurance is mortgage protection insurance, which pays off the balance of your home loan if you 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. Allows you to increase coverage without taking a new medical exam or going through the underwriting process again — though you’ll pay higher premiums if you choose to step up the death benefit. Note that guaranteed insurability riders are typically only available on permanent life insurance policies.
Cost-of-living rider. Lets you increase the death benefit to keep pace with inflation.
Buy more term coverage. Another option is to invest in 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.
