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A look at Increasing Term Life insurance

The illusion of increasing life benefits

There are many types of term life insurance on the market besides the most common Level term option.  One variant of the available policies is increasing term life.  In the slippery world of "get something for nothing", this type of option can be very appealing to many shoppers of life insurance.  Let's take a look at increasing term life benefits to really understand what's at play.

Increasing, decreasing, level, trapezoidal...there's all kinds of different term life options these days (trapezoidal not being one of them).  They're pretty simple in both design and intent.  For example, with increasing term life, the intent is that this policy's total life benefit would increase as you get older.  The obvious desire for this is to match expected higher needs that may accompany the different phases of a person's life.  As we're all aware, our responsibilities, both financially and otherwise, just seem to grow with time.  

We all know that life insurance rates are strongly influenced (if not outright driven) by our age at the time of application/enrollment.  Wouldn't it be great to lock in the ability to increase our term life insurance benefit (akin to buying more coverage) as we get older.  For example, if we buy a term life policy for 20 years that offers $100K for the first 5 years, then $250K for the next 5 years; $500K for year 11-15; and $1M for year 16-20.  In our minds, we may not be able to pay for $1M of benefits 15 years from now due to the cost at that age and and we may not even qualify for that protection based on health.  How is the carrier able to do this?

With enough data, some smart statisticians, and a few late nights, voila...increasing benefit term life.  Like with all things in life, there's no free ride so let's analyze this option to see how it really works.  Essentially the carriers break down the risk, probability, and resulting term life rates out separate as if they were four separate policies.  $100K based on today's age for 5 years.  $250K based on your age 5 years from now for 5 years term, etc.  You add these rates together plus a variance to accommodate actual claims experience from increasing term and you have the total life insurance premium rate that they will charge you. 

What's our take on increasing term life?  The big problem is what if you pass away in the first 5 years.  $100K is not going to help much over the next 15-19 years.  This is a real gamble that assumes your life insurance needs are much less now.  Most people only think to shop for life insurance at the birth of a baby, marriage, or purchase of a home...all of which carry significant financial responsibilities that start from day 1!  Taking this risk is only a tad less risky than having no life insurance.  The smarter move might be to quote $500K of term life (the mid point in the above levels of term life benefits) for the 20 year window.  If anything, since term life insurance can best be regarded as replacement of income over a period of term, you want a higher amount in the beginning since the remain years during which income needs to be replaced is longer.  In this respect, we feel increasing term life has it backwards.   

 

 

 

 

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