Increasing sum assured term insurance plans
Many insurers offer these inflation-fighting plans. As its name suggests, your cover increases each year so that you’re never underinsured. But are they too expensive?
Hopefully, you’re convinced that term insurance is all you need. As we’ve said many times before, no mixing of investment and insurance is necessary. Term insurance, which is available at relatively low prices, protects your family’s lifestyle in case of your early death. But it’s also an inflexible product. With inflation drowning out your savings, won’t you need to up your term cover each year? That’s why insurance companies have increasing sum assured plans as part of their portfolio. Let’s find out if they are worth buying:
Why it’s useful
Theoretically, an increasing cover option is a great buy. Inflation keeps increasing your needs, so if you think Rs50 lakh is enough as risk cover today, it will surely not be adequate 10 years from now. This is the problem increasing sum assured plans seek to solve. SBI Life, Birla Sun Life, Bajaj Allianz, Aegon Religare and many others offer this plan. With it, the sum assured increases by 5% each year, not in step with inflation, but perhaps an adequate increase. If you start off with a sum assured of Rs50 lakh, it would have increased to Rs75 lakh by year 10.
Is it more expensive?
It always is more expensive, but not always by that much. Some companies charge too much for it, others don’t. Let’s take two examples of the price:
SBI Life: SBI Life’s Smart Shield plan makes room for a 5% increase each year, but it’s much costlier than a regular plan. So if a 30-year-old seeks a 20-year regular policy for Rs1 crore, the annual premium would be Rs13,399. With the increasing term plan, however, it would cost Rs20,023. That’s a 34% increase in the annual premium. Over 20 years, that’s a difference of Rs1.4 lakh.
Birla Sun Life: On the other hand, with Birla Sun Life’s Protector Plus plan, the difference is smaller, at just Rs3,500. So if a 30-year-old were to buy a Rs1 crore, 20-year plan, he’d pay Rs12,758, whereas the increasing sum assured plan would cost Rs16,292.
Is it worth it?
The increasing sum assured plan is a good improvement over the basic plan. It is more expensive, but then again insurance costs do increase with age, so the increase is justifiable. At age 30, you’d have to pay Rs12,758 to insure yourself for Rs1 crore with Birla Sun Life. At age 40, you’d be paying Rs10,800 for a Rs50 lakh policy with the same company. And that’s just at current rates. So even if you were to buy a new policy every five years, the cost of insurance would go up.
However, you should note that none of the companies that we found to be cheapest for term insurance offer this type of plan. So if it’s cost savings that you’re looking for, perhaps you should buy from one of them. On the other hand, if you like the idea of your insurance cover rising with each passing year, this is a good option at the right price.