Term Insurance: Save up to ₹10 lakh by upgrading your policy smartly

The importance of having term insurance is well known, but if there is some strategy to save some extra buck without compromising on the coverage amount, why not adopt it.

Before going further into the topic, let's touch upon the context we would be discussing here.

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In the initial years of our career, i.e. in our early-mid 20s, the responsibilities in life are less and hence, the need for lesser term insurance cover. At this stage, a coverage amount of ₹50 lakh to ₹1 crore seems fine. In fact, if the parents are still working a number around ₹25 lakh might be enough, which can cover if he/she has any loan like education loan, vehicular loan etc.

However, as we grow older, our goals increase, our aspirations become bigger and our lifestyle expenses also rise.

Contrary to what we might believe that we will save more when we earn more, we actually tend to increase our spending first getting accustomed to a higher lifestyle, says Shweta Jain, certified financial planner, founder, Investography, and author, My Conversations with Money, adding, and so we need a bigger coverage that can protect our family in case of any unfortunate event.

Conventionally, it is suggested that we buy a second term plan that can cover the gap. But, there is a second way too, explains personal finance coach and YouTube influencer Paritosh Sharma.

Enter, increasing cover options for a term insurance policy!

Now, what is a term insurance policy with an increasing cover option?

In an increasing term insurance plan, the sum assured increases every year by a predefined amount (usually 10%) to adjust against inflation or other financial goals. Unlike a regular term insurance plan, an increasing term plan allows the policyholder to increase the sum assured during the policy period. The premium amount may change slightly but usually remains the same, as per Bajaj Allianz.

However, they are higher priced than normal term plans.

The next possible question comes, why would I buy this option, if I can add a second policy when my income is higher in my 40s.

Let's crunch in some numbers to understand which is a better option.

Suppose you take a normal term policy of ₹1 crore cover (till 70 years) amount at the age of 30 for an average premium amount of ₹14,500 yearly. So for the next 40 years, you pay a premium of ₹5.8 lakh for this policy. Next, at 45 years, you buy a second ₹1 crore policy for ₹30,000 yearly premium and for 25 years you pay a total amount of ₹7.5 lakh. And, you buy the third policy of ₹50 lakh at 50, for a yearly premium amount of ₹24,000. Till 70, you pay ₹4.8 lakh. So the total premium you pay for all three policies is ₹18.1 lakh

Now, the premium for ₹1 crore term policy (increasing cover) comes around ₹20,000 yearly at the age of 30. And for 40 years, you pay a total premium of ₹8 lakh but your coverage amount keeps constantly moving up.

Despite the higher premium amount, it is still beneficial to buy a term plan with increasing cover benefits, Sharma said adding, in fact, it is the only term plan that can be said more beneficial than a regular term plan.