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Term life insurance typically offers the highest death benefit per dollar spent on premiums, making it a cost-effective coverage option. You may be familiar with level term life insurance, which maintains a fixed death benefit and unchanging premiums for the policy term. However, policyholders sometimes need more coverage with time to counteract inflation or plan for financial goals. Increasing term life insurance may come in handy in these situations. Let’s dive deeper into the benefits and drawbacks of this policy and some alternatives to help you select the best option for your life insurance needs.
Increasing term life insurance is a form of term life insurance that increases your death benefit by a specified amount yearly without new underwriting. Premiums may be fixed, but in many cases, they increase with the death benefit.1 The increasing death benefit feature is built into the policy rather than being attached as a life insurance rider.
Increasing and decreasing term life insurance both modify traditional term life insurance policies to change the death benefit. However, they work differently in several areas:
Consider these pros and cons when weighing increasing term life insurance against your life insurance needs:3
Inflation is the process of your money losing some value every year. Since traditional life insurance policies have fixed death benefits, they may become less valuable over time due to inflation.
An increasing term life insurance policy guards against inflation by helping to boost your death benefit each year. That way, if you pass away several years into the policy term, your loved ones may not lose significant monetary value through inflation.
Inflation isn’t the only reason you might need a larger death benefit. Your loved ones may need more funds to help cover significant future expenses. For instance, imagine you plan to purchase a new, larger home. You may have higher monthly mortgage payments, utilities, repairs, and other expenses. An increasing term life insurance policy can help you prepare for those increases by helping ensure your loved ones receive the financial protection they may need. Another example might be education. If you have a new child, you may need more coverage to help your family cover college costs.
Applying for a new term life insurance policy involves new underwriting. This means you’ll have to apply again and undergo another medical exam. However, increasing term life insurance can help you avoid this by increasing your death benefit each year to add to your coverage. This saves you time and energy filling out applications and fitting medical exams into your schedule.
Many increasing term life insurance policies raise premiums yearly. In the long run, this may cause your increasing term policy to cost more than a level term life insurance policy. Therefore, this policy may not work well if you can’t increase your income or cut expenses yearly to accommodate the rising premiums.
Insurers tend to set a ceiling on how much the death benefit can increase.3 When it stops increasing, you may be stuck with that level of coverage for the remainder of the policy. This may reduce your ability to keep up with rising inflation or larger future expenses. However, this may be a less pressing issue if inflation is low and your income is rising relative to your expenses.
As mentioned, rising premiums might make it harder to afford coverage if you do not increase your income or cut expenses. Furthermore, fluctuating premiums add complexity to your budgeting. Each year, you may have to adjust your budget to account for higher premiums. This might make budgeting a little more complex than with a level term life insurance policy.
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Insurers may structure the death benefit to increase by a percentage or flat rate. Here is how each one works, assuming a 10-year, $100,000 increasing term life insurance policy:3
This is how the policy might increase, given a 5% annual increase in the death benefit:
| Year | Initial Death Benefit | Percentage Increase | New Yearly Death Benefit |
|---|---|---|---|
| Year 1 | $100,000 | 5% | $105,000.00 |
| Year 2 | $105,000 | 5% | $110,250.00 |
| Year 3 | $110,250 | 5% | $115,762.50 |
| Year 4 | $115,762.50 | 5% | $121,550.63 |
| Year 5 | $121,550.63 | 5% | $127,628.16 |
| Year 6 | $127,628.16 | 5% | $134,009.56 |
| Year 7 | $134,009.56 | 5% | $140,710.04 |
| Year 8 | $140,710.04 | 5% | $147,745.54 |
| Year 9 | $147,745.54 | 5% | $155,132.82 |
| Year 10 | $155,132.82 | 5% | $162,889.46 |
Here is how the term life policy might increase, given a $20,000 annual increase in the death benefit:
| Year | Initial Death Benefit | Flat Rate Increase | New Yearly Death Benefit |
|---|---|---|---|
| Year 1 | $100,000 | $5,000 | $105,000 |
| Year 2 | $105,000 | $5,000 | $110,000 |
| Year 3 | $110,000 | $5,000 | $115,000 |
| Year 4 | $115,000 | $5,000 | $120,000 |
| Year 5 | $120,000 | $5,000 | $125,000 |
| Year 6 | $125,000 | $5,000 | $130,000 |
| Year 7 | $130,000 | $5,000 | $135,000 |
| Year 8 | $135,000 | $5,000 | $140,000 |
| Year 9 | $140,000 | $5,000 | $145,000 |
| Year 10 | $145,000 | $5,000 | $150,000 |
Increasing term life insurance isn’t your only option for raising your death benefit to protect against inflation and plan for the future. Here are some alternatives to increasing term life insurance:1
A guaranteed insurability rider, also known as a guaranteed purchase option rider, helps you buy more insurance coverage at predetermined future dates without new underwriting or a medical exam. This gives you more choices when increasing coverage and premiums. Unlike increasing term life insurance coverage, you don’t have to exercise your option to buy more coverage if you don’t need it.
A cost-of-living rider is designed to keep pace with inflation by increasing your death benefit in line with changes in the Consumer Price Index (CPI), a key inflation measurement. Premiums rise whenever the death benefit increases.4
Cost-of-living riders can be helpful if the primary reason you need an increasing death benefit is inflation. It balances your increasing life insurance needs and future plans with present-day budgetary concerns.
You can purchase an additional policy if you need more coverage. This gives you more options for customizing coverage and potentially gives you more coverage than other options. However, you’ll need to go through new underwriting. You may also need to take a new medical exam unless you purchase a permanent, no-exam policy.
Increasing term life insurance can help policyholders protect against inflation and plan for large financial goals, especially if they foresee drastic income or wealth growth in the future. However, you must consider the rising premiums before purchasing one of these policies. If you have more questions or you’re ready to explore your life insurance options, speak with an Aflac agent today to learn more and get a quote.
1NerdWallet - What Is Increasing Term Life Insurance? Published April 9, 2024. https://www.nerdwallet.com/article/insurance/increasing-term-life-insurance. Accessed May 29, 2024.
2Investopedia - Decreasing Term Insurance: Definition, Example, Pros & Cons. Updated July 23, 2023. https://www.investopedia.com/terms/d/decreasing_term_life.asp. Accessed May 29, 2024.
3Policygenius - What is increasing term life insurance? Updated March 6, 2024. https://www.policygenius.com/life-insurance/increasing-term-insurance/. Accessed May 29, 2024.
4NerdWallet - What Is a Cost-of-Living Rider for Life Insurance? Published February 1, 2024. https://www.nerdwallet.com/article/insurance/cost-of-living-rider. Accessed May 29, 2024.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.
Aflac life plans - 68000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. 65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.
Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations, and exclusions.
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