are many types of term life insurance
on the market besides the most
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
phases of a person's life. As
we're all aware, our responsibilities,
both financially and otherwise, just
seem to grow with time.
all know that life insurance rates are
strongly influenced (if not outright
driven) by our age at the time of
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?
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
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.