All You Need to Know About Incremental Term Life Insurance Policy

May 23, 2022 Mutual Fund

Term Life Insurance is the purest and most affordable form of life insurance that provides coverage for a certain period called ‘term’. In case of the policyholder’s unfortunate demise, it provides financial protection to their family as per the policy agreement. While calculating the required life insurance coverage of an individual, several factors are taken into consideration, such as the individual’s age, annual income, total debt, geographical location, gender, current savings, investments, etc. These factors help in understanding your current and future financial objectives, based on which your sum assured is calculated.

However, with increasing age and lifestyle changes, our financial objectives change over time. Besides, the rate of inflation is constantly going upward. In such a case, the sum assured that seems adequate to you at this moment might not be sufficient for your family if and when they have to make a claim. What could you do in that case? Do you have to buy a separate term plan as and when your financial objectives and lifestyle change? An Incremental Term Life Insurance Policy is the answer to all these questions.

Before moving to Incremental Term Life Insurance, first, let’s understand what Life Insurance and Term Plans are:

Life insurance is a contract between an insurer and a policyholder. An insurer guarantees a sum assured to the beneficiary/s or nominee/s of the policy on the policyholder’s unfortunate demise in return for the premiums paid.

A term plan is basic life insurance that everyone must have to provide financial protection to our dependents at an affordable premium. It provides life cover for a certain and predefined period called ‘term’. In case of the sudden demise of the policyholder, the insurer provides the sum assured to the nominee/s. A policyholder is required to pay the premium for the chosen term to ensure uninterrupted life cover.

What is an Incremental Term Life Insurance Policy?

An Incremental Term Life Insurance Plan is a type of term plan in which the life cover gets increased by a fixed amount every year. The fixed increase can be calculated by considering your future financial objectives and the rate of inflation. The Incremental Term Plan can be highly beneficial to you and your family as it can beat the inflation and ensure your family receives adequate funds to meet their financial objectives even in your absence.

For example, if you buy an Incremental Term Plan with a sum assured of Rs 1 Cr and a fixed increment of 10% every year. If at the end of the 10th year of the policy term, an unfortunate event occurs, the nominee will receive Rs 1 Cr plus the accumulated amount of 10% every year, i.e., Rs 2 Cr.

How much is the premium of the Incremental Term Life Insurance Policy?

Since the Incremental Term Plan offers the huge benefit of increasing the sum assured every year, the premium of these plans is slightly higher than the basic term life insurance plans.

The premium can be the same throughout the policy period or may increase every year, depending on the insurer and the policy you choose.

What are the benefits of buying an Incremental Term Life Insurance Policy?

1. Beats Inflation:

The life cover chosen at the time of purchasing the policy might be insufficient for the family for their long-term objectives as the rate of inflation is continuously going upward. However, opting for an Incremental Term Plan can help you counter inflation. It ensures your life cover increases with the increasing rate of inflation. This will help your family with sufficient financial support to fulfil their long-term needs in your absence.

2. Meets Your Increasing Requirements:

Since most individuals buy term plans as soon as they start working, their family responsibilities and requirements increase with each life stage. For example, a term plan cover bought when you were unmarried might not be sufficient for your family after you get married and have children. As life cover increases in Incremental Term Plan, it will offer sufficient coverage to your new family members.

3. Cost-effective:

Although the premium of an Incremental Term Plan is higher than the basic term plan, the slight increase in the premium is worth it because you get benefited with the higher life cover at an affordable premium.

4. Death Benefit:

Similar to Vanilla term plans, most Incremental Term Insurance Plans offer death benefits in a lump sum. However, some insurers also suggest choosing a monthly or annual payout for a certain period that ensures your family receives regular income in your absence.

5. Riders:

You can buy riders with your Incremental Term Plan by paying a slightly higher premium. It lets you customise your term plan as per your requirements. The riders provide you with comprehensive coverage towards the specific high-risk areas considering your lifestyle. Some of the popular life insurance riders are Accidental Death Benefit, Return of Premium, Waiver of Premium, Critical Illness, Accidental Disability, etc.

6. Tax Benefits:

The premiums paid towards the Term Insurance Policy qualify for tax deduction up to Rs 1.5 Lakhs under Section 80C of the Income Tax Act. Moreover, income on maturity is tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium under Section 10(10D) of the Income Tax Act.

To Conclude:

An Incremental Term Life Insurance Plan offers several benefits and ensures your family is provided with sufficient financial support when you are not around. It offers maximum coverage at an affordable premium. If you are young and know that your responsibilities will grow as you age, buying an Incremental Term Plan makes sense. It is advisable to consider your financial goals, current and future requirements, and responsibilities when deciding whether to opt for an Incremental Term Plan and its cover.

This article first appeared on PersonalFN here