Can I buy an increasing term insurance cover?

Published: May 6, 2021 at 8:42 am

Deepesh asks, “I calculated the term life insurance cover required for me to be close to two crores. However, I doubt if I will get this cover given my current income profile, even if I’m willing to pay the associated premium. In such a case, should one consider buying a term plan with increasing cover?”

How does an increasing term insurance cover work? These policies come with a 5% annual increase in sum insured (SI) until it becomes double the original sum insured. For examples, if the SI is 100 lakhs (1 crore) in the first year, it will be 105 lakhs in the second year, 110 lakhs in the second year, and so until it reached 200 lakhs (2 crores). After this, it would remain constant.

At first sight, this seems enticing. Then the insurer would say, you can fight inflation this way. The catch is the cost. Since the risk of higher payout increases each year for the insurer, the premium for 2 crores sum insured will be charged from day one. We would be paying a premium corresponding to a two crore term plan for several years (for the first 14-15 years in the above example), while the actual SI would be less.

From the insurer’s point of view, this higher premium is necessary to cover the cost of increased risk, but it is an unnecessary expense from our point of view. The insurers would argue, if you buy a one crore policy first and then buy another one crore policy 10 years later, the effective cost would be more. While this is indeed possible, there is no need to be paying an extra premium from day one.

Suppose you have just started working, and your net worth is essentially zero. You buy a one crore term insurance cover. This means the effective net worth of your nominee is one crore (assuming they are totally dependent on you). Even if your income is low, can you not increase your net worth each year by 5% simply by investing each month and increasing this investment each year?


This way, your nominees net worth effectively increases about 5% each year with one crore as the base. If you factor in return on these investments, the increase in net worth each year would be a comfortable 5-10%.

By simply paying your first, by simply investing each month (or whenever possible) in a disciplined manner, you can easily beat the “benefit” of an increasing term life insurance. Plus, the premium cost is also lower.

If you become a parent, you can always buy another plain term insurance if necessary. Even if you have an increasing term life cover, the annual increase would be too small to accommodate a child’s future needs, meaning you still need to buy additional cover!

Therefore, please buy a simple term insurance cover for the maximum amount the insurer is willing to provide for your income levels and focus on increasing your net worth aggressively. This would comfortably beat the benefits of an increasing term insurance cover.

Do share if you found this useful

Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 640 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2525 investors and advisors are part of our exclusive Facebook Group! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 585 salaried employees, entrepreneurs and financial advisors are part of our exclusive Facebook Group! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps