Benefits of incremental term insurance plan

Insurance companies come up with innovative products from time to time in order to meet the varying needs of policyholders. The incremental term insurance plan is one such innovative product that is aimed at making life easy for the heirs of a deceased policyholder. Let us look at the features of the incremental term insurance plan to understand its benefits for the policyholder.

The incremental term insurance plan is a modified version of the term insurance plan. In a term insurance plan, the sum assured of the policy remains the same over the entire tenure of the policy. This means that if a 30-year-old person buys a term insurance plan with sum assured of Rs 1 crore for a period of 30 years, the sum assured will remain the same for the entire duration of the policy. So, if the person were to die 5 years after buying the policy, the heirs of the deceased would get Rs 1 crore from the insurance company, which would be quite sufficient to meet the expenses of the heirs of the deceased for few years. However, if the person were to die after 25 years from the date of purchase of the policy, the heirs would be getting the same amount of Rs 1 crore. In this case, the value of Rs 1 crore would have depreciated quite a lot during 25 years due to inflation and, as a result, the amount of Rs 1 crore may not be adequate enough to meet the needs of the heirs.

This is where the incremental term insurance plan provides an edge over the regular term insurance plan. In the incremental term insurance plan, the sum assured increases by a pre-determined percentage every year, so that the effect of inflation is effectively negated. So, if the average inflation is, say, 6% per annum and the increase in sum assured of the insurance policy is fixed at, say, 8% per year, the sum assured will increase at a rate higher than inflation, which will effectively negate the erosion in the value of the policy amount payable to the heirs on the death of the insured.

Of course, the policyholder has to pay a higher premium every year for the increment in the value of the sum assured. Since the income of a person usually rises every year, it is not difficult for the policyholder to pay a higher premium every year to protect the value of the policy amount from erosion due to inflation.

Apart from the benefit of increase in sum assured every year, the incremental term insurance plan also provides the same benefits of term insurance plan through various types of riders, such as critical illness rider, accidental death rider, premium waiver rider, etc. The benefit of income tax exemption up to a maximum of Rs 1.50 lakh per annum is also available on incremental term insurance plan under Section 80C.