Buying a term plan where the sum assured goes up to match the growing responsibilities is ideal for young people. Such a policy helps combat inflation by ensuring that the coverage remains adequate even as the cost of living rises, providing long-term financial security for their loved ones.
Typically, young people at the beginning of their careers might not think about a very high sum assured. Their responsibilities tend to go up as they grow older, so it makes sense for them to opt for a plan where the sum assured goes up after a certain period. They can start with lower premiums, which gradually increase as the coverage expands, making it both affordable and future-proof.
An increasing term insurance plan automatically adjusts the sum assured to match growing responsibilities such as birth of a child or purchase of a home without needing additional policies or riders.
Ideally, the term insurance coverage should be 10-15 times of the individual’s current annual income. For instance, if the individual is earning `10 lakh per year at the age of 30, a sum assured of `1-1.5 crore is recommended. However, by the time he reaches 40, the income might have doubled, and so should the sum assured. At this stage, if he is earning `20 lakh annually, it would be wise to increase the coverage to `2-3 crore.
Rhishabh Garg, head, Term Insurance, Policybazaar.com, says such a plan helps young people keep pace with life’s milestones such as a house loan, familial responsibilities or supporting old parents. “It is advisable to opt for a reasonably high sum assured of `1-2 crore so that it can match the increasing rate of inflation in future,” he says.
Align the increase with inflation rate
Sharad Bajaj, COO, InsuranceDekho.com, says as the cost of living increases over time, an increasing sum assured ensures that a young person’s financial protection grows accordingly. “As career progresses and income grows, an increasing plan will allow the coverage to increase proportionately,” he says and adds that what seems like sufficient coverage today may not be enough 10-15 years down the line.
Ideally, the sum assured should increase by a percentage that reflects both the inflation rate and the individual’s growing financial responsibilities. Additionally, as one progresses in age, the sum assured should account for growing financial responsibilities such as education expenses, loans, and healthcare costs.
Rakesh Goyal, director, Probus, an insurance broking firm, says a general recommendation is to align the increase with the inflation rate. “A balanced approach might involve an annual increase of 5 to 10% in the sum assured to ensure that the coverage remains relevant and sufficient throughout the policy term.”
This percentage can help offset the impact of inflation and ensure that the coverage remains adequate over time. For instance, if inflation averages 5-6% annually, a 10% increase in the sum assured could suffice for the policyholder. Additionally, as one’s income and liabilities grow with age, this increment helps in maintaining a suitable level of protection. “If the policy is purchased for a tenure of 30 years and the policyholder dies in the 20th year, the nominee will be entitled to get the increasing sum assured that has been accumulated in those 20 years,” says Garg.
Factors to consider
Policyholders must understand the fixed rate at which the sum assured will increase annually and be clear on when the premiums might increase. It is essential to ensure that the premium remains affordable throughout the policy term, even as the sum assured increases.
The increase in sum assured should align with their financial goals and future inflation. They must evaluate the current and anticipated financial obligations, such as dependents, loans and lifestyle maintenance. It is crucial to understand if there is a cap on the total sum assured that can be reached and ensure that it aligns their long-term protection needs.