Most of the people who buy term insurance don’t have a clear idea about the quantum of coverage they need and choose a plan with a lower sum insured. To avoid the confusion, it is better to choose a policy that allows you to increase the sum insured over time. Read on to know more about it.
When it comes to buying a term insurance policy, it is important to choose a plan with high sum assured based on your specific needs and financial status. The optimal level of coverage must be determined based on your income, expenses, liabilities, number of dependent family members, financial goals, etc. However, you must know that the financial condition can be dynamic. It may change overtime, with age and at different stages of life. Not to mention, the increasing inflation rate makes it mandatory to have a higher coverage in the later years of life.
As such, determining the exact amount of sum assured needed for term insurance plans can be challenging. What if you need a higher cover during the later stages of your life? An incremental term insurance plan comes as the perfect solution for such situations.
What is an incremental term insurance plan?
As the name suggests, an incremental term insurance policy is a type of term insurance plan wherein the sum assured you choose at the time of buying the policy increases every year by a specific amount or percentage throughout the policy term. The incremental term insurance policy is specifically designed keeping in mind the growing inflation and allowing the policyholders to get maximum coverage.
How does an incremental term insurance policy work?
Let us understand the working of an incremental term insurance plan with an example.
Mr. Sunil, is a 40-year-old individual who buys an incremental term insurance policy with a sum assured of Rs. 20 lakhs for a period of 30 years. The plan allows a 5% increase in the sum assured at the start of every year to a maximum increase of 200% of the original sum assured. So, this is how Mr. Sunil’s sum assured will increase during the plan tenure.
In year 1, the sum assured will be Rs. 20 lakhs. It will increase to Rs. 25 lakhs in year 5 and to Rs. 29 lakhs in year 10. In year 20, the sum assured will be about Rs. 39 lakhs and from year 20 to 30, the sum assured will be Rs. 40 lakhs.
This means if Mr. Sunil passes away in the 20th policy year, the insurer will pay Rs. 39 lakhs to the beneficiary.
Benefits of buying incremental term insurance
Now that you know how the incremental term insurance policy works, it would help you know its advantages.
As the inflation is increasing every year, you would need sufficient coverage that beats the inflation. And, buying an incremental term insurance plan is the best solution to safeguard your family’s financial future; the increasing coverage will ensure that your family gets a higher amount so that they can cope with the increasing prices of goods and commodities and manage their expenses.
When you buy a term plan at a young age, you may have little or no financial responsibilities and therefore you can afford to buy a term plan with lower sum assured. But, as you get married, start your family, your responsibilities grow and you would need sufficient financial protection from your insurance. An increasing term insurance policy can help you meet this need as it steadily increases the coverage amount over time.
Just like other term insurance policies, the incremental term plan allows you to get tax benefits. The premium you pay is eligible for deduction to a maximum limit of Rs. 1.5 lakhs in a financial year under Section 80 C of the IT Act.
Final Word
An incremental term insurance plan ensures that your family gets maximum financial protection and gives you peace of mind knowing that they are sufficiently protected.
