Increasing Term Insurance : Is it a better option?

POSTED BY raghu ON February 6, 2012 10:24 pm COMMENTS (9)

Hi,
I’m 25, looking for a good Term insurance plan. While searching I came across the “Increasing Term Insurance” type that increases the SA by some percentage.

I’ve zeroed in on the following options :
SBI : 40 lacs @5% = 11353 rs
SBI : 50 lacs @5% = 13198 rs
Birla : 40 lacs @10% = 13291 rs

I beleive Birla will be the best for me. At 10%, it beats inflation, and increases the cover amount substantially.

Questions :

1. Does Increasing term insurance make sense? are then any disadvantages that I may be overlooking?

2. Does the Birla Plan above look good?

Appreciate your help. Thanks

9 replies on this article “Increasing Term Insurance : Is it a better option?”

  1. madhukaranand85 says:

    I choose to disagree the 10% increment on base works out to be around 4.8% compounding rate . The long term compounding rate of india inflation is for last 56 year is 5.3 % so it nearly adjust inflation.
    Since the difference in premium for 50 lakhs is around 10,000 for the term of 30 year and policy holder is 28 year .The NPV of such investment at 10% return would be 1.12 lakhs.

    At inflation adjusted the additional cover NPV would be 73.8 assuming 5 lakh additional cover each year.

    So it makes sense to have the increasing return cover.

    It is certainly more suboptimal to have an increased cover at the beginning itself. You don’t have any dependent and yet you have a big cover and when you need cover then inflation has eroded the cover 🙂

  2. Dear Raghu, as a big cover is now available to you & at a cheaper prem. my advice ‘ll be to start thinking of investing. Please try to invest as max. as possible to you. Today’s small amounts ‘ll convert into a big corpus due to the magic of compounding.

    Thanks

    Ashal

  3. raghu says:

    Hi Ramesh,

    I never thought about it that way. You are right, it makes sense to think about assets + life cover. Reminds of this wiki I read :

    http://en.wikipedia.org/wiki/Theory_of_Decreasing_Responsibility

    @Ashal, you are right, I’ve been foolishly thinking the % increases are compounded – they are not.

    Thank you for your valuable insights, I’ve completely reverted my decision from buying increasing term plan 🙂

    I think I’ll go for ICICI Pru iCare, 1C life cover is 11,692 rs after tax.

  4. Dear Raghu, Please check again your 10% yly increase. As far as I know it’s a simple increase & not the compounding one as illustrated by you. So the actual cover hike ‘ll be 10% of basic sum assured every year. For you I personally checked the Birla site & FYI please, the minimum Sum assured is 50L Rs. & it’s clearly written on site that yly hike in sum assured ‘ll be 5L Rs. only which is 10% of your basic sum assured. So please check with your insurance agent or financial adviser. The sum assured of 40L is not correct.

    For 50L Sum assured & 10% yly hike, the prem. for your age & term of 30Y (the max. possible) is 14835 Rs. with out any rider. Now do compare this prem. amount with the online cover of 1 crore Rs. from day one & post your findings here in this discussion.

    Thanks

    Ashal

  5. raghu says:

    Hi Ashal, BanyanFA

    Thank you for your comments, it provides a new perspective that I hadn’t thought of.

    My only concern is that if I get, say 1C cover now, the value will get eroded as time passes. I mean, in 10 years 1C might not be much, and I might have to get a new plan. Another factor is that at this time 1C cover is a lot for me, but later that will change, mostly in an upward direction.

    If I go with 40L @10%, then in 10years it’ll be 1C, and grows substantially later :

    1 4400000.0
    5 6442040.0
    10 10374969.8404
    15 16708992.6777
    20 26909999.7973
    25 43338823.7736
    30 69797609.0755

    I do plan to add to my cover if required, when I get married and get more liabilities. However, the increasing option is a bit expensive then the level plan.

    Is my reasoning sound?

    1. Ramesh says:

      Do you mean to say, you are not going to have any other assets apart from this life cover?

      If you have other assets, the value of those assets + the life cover is what your family will get, in case you are not there. So, plan for the basket of (assets + life cover), and not only the life cover.

      If you do not plan to have any other assets, get going about that.

      Increasing life term cover is both complicated and suboptimal. In case, you want to bump up your life cover (because of xyz reason), buy another term policy at that time.

  6. BanyanFA says:

    Hi Raghu,
    First of all congratulations to think upon getting a Term Insurance. Not many people think about this important insurance component.

    I completely agree with Ashal – you should take a big cover from day one, rather than an insurance cover which increases with age. If you would give it a deeper thought, your asset balances increase over a period of time and hence it is most important to have a big cover when your assets / investments are not big enough to support your dependents. For example, if you have a wife and two kids with no investments as of now, it is better to have an insurance cover of Rs. 50 lacs / 1 crore today. As you would grow in life, you shall start increasing your investments which would complement your requirement to have insurance. If 10 years down the line, you have investments worth 1 crore, then you may not find having insurance necessary as your investments may be sufficient to bear the cost of living of your dependents.

    Hence – have a big cover from today. I would suggest the best ones being SBI Life’s Term Cover.

    1. Ramesh says:

      @BanyanFA,

      Very good explanation. Thanks.

      Ramesh

  7. Dear Raghu, how about purchasing a big cover from the day one? Say a 60L or 75L or even 1Crore Sum assured cover from start. if you opt for an online policy, the 1 crore Rs. for next 35Y term ‘ll be available to you at a prem.around 10K Rs. yes you read it right just 10K.

    In my opinion, a flat cover of constant sum assured is any day better than an increasing or decreasing cover. You are thinking that 10% increase is enough to beat inflation, but my dear friend, you are single at present & ‘ll not remain so always. The moment you are married or even before that just you have a takn a big ticket loan say home loan, a good part of your term cover ‘ll not be available for family members as the value ‘ll be set off against loan.

    Think over it.

    Thanks

    Ashal

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