Increasing Term Insurance
Learn about Increasing Term Life Insurance and how it works
What is increasing term life insurance?
Increasing term life insurance is a policy designed to increase in line with inflation. This means that both your pay-out cover amount (the death benefit) and your monthly premiums (the cost) will rise as the inflation rate does, over the term of your policy. Increasing term life insurance is also known as indexation or index-linked protection. An increasing term policy provides you with the financial security of countering the effects of the rising costs of living.
The rate of increase of your premiums and cover are calculated using indexation methods, and are dependent on each individual insurer. Once determined, your policy will increase by a percentage chosen each year, or directly in line with the inflation percentage increases. For example, a 5% increasing term on a £100,000 policy means that, in 5 years, your pay-out amount will become:
| Year | Cover | Percentage increase |
|---|---|---|
| Beginning of policy | £100,000 | N/A |
| 1 year later | £105,000 | 5% (cover x 1.05) |
| 2 years later | £110,250 | 5% (cover x 1.05) |
| 3 years later | £115,762.50 | 5% (cover x 1.05) |
| 4 years later | £121,550.63 | 5% (cover x 1.05) |
| 5 years later | £127,628.16 | N/A |
In this instance, 5 years after the start date of your policy, the cover will have increased to £127,628.16, and your future premiums will have risen too, often by a higher rate than the cover increase, because many insurers factor in your increasing age with each year onto the premium prices [1].
In a year, your cover can face a maximum increase of 10% for most insures (this can however vary), and your premiums can potentially rise up to 15% in some cases. It’s important to note that you can choose not to accept the increase, and both your cover and premiums will instead remain the same. But this can only be done a certain number of times – more on this below.
How is Increasing Term Life Insurance Determined?
Increasing term life insurance is determined based on the methods chosen by each specific insurance company. However, this is usually carried out by annually reviewing the cover amount on your policy and increasing it according to the inflation index that your chosen insurer uses, which will be explained when they write to you. This will be one of the following:
- A flat rate increase each year
- The Retail Price Index (RPI)
- The Consumer Price Index (CPI)
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Flat rate increase each year
Flat rate increases are determined by the insurer at the outset of your policy and are typically increases within the range of 2% to 15% each year.
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The Retail Price Index (RPI)
The RPI is a measure of inflation. No, not the party balloons kind… this RPI evaluates the variation in prices of a basket of retail items, thus determining the cost of living [2], and then records the increases as economic inflation over time. What this means is general, everyday items that are commonplace in most people’s lives – groceries, furniture, fuel, housing costs, leisure services, etc – are monitored as their prices fluctuate annually to observe the price changes [3].
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The Consumer Price Index
The CPI is another measure of inflation. It’s the UK’s main domestic method in calculating the price increases of standard goods and services, and it operates the same as RPI measurements do, differing only in the sense that RPI includes the cost of living with its inflation levels – rent, mortgage repayments, etc – whereas CPI does not. This is why RPI inflation is typically higher than that of CPI. You might also come across CPIH, which is CPI with the inclusion of housing costs and council tax [4].
Many insurers use CPI to calculate their inflation rates, whilst many others use RPI. This will be determined by your insurance provider and disclosed by them before the beginning of your policy.
The below table is an example of an essentials basket and its observed price variations, which is a method used to calculate the inflation rate:
| Basket Essentials | Weight (%) | Observed Variation In Price Changes |
|---|---|---|
| Food and Drink (non-alcoholic) | 9.6 | medium |
| Alcohol and Tobacco | 3.5 | low |
| Clothing and Shoes | 4.8 | medium |
| Housing, Gas, Electricity, Fuel, Water, etc | 30.3 | low |
| Furniture and Household Goods | 5.6 | low |
| Transport | 11.1 | low |
| Health | 1.8 | low |
| Communication | 1.9 | medium |
| Recreation and Culture | 11.2 | high |
| Education | 2.3 | low |
| Restaurants and Hotels | 11.2 | low |
| Miscellaneous Goods and Services | 6.7 | low |
Data sourced from the Office for National Statistics [5]
The “weight” label represents the significance of the items, as people naturally spend more money on certain categories (such as gas and electricity) than others (such as education). The weight values add up to a total of 100%.
The “observed variation in price changes” quite literally observes whether or not the prices have fluctuated wildly or mildly.
Graph 1 below represents the RPI inflation rate over the years, beginning in 2001 and into what is predicted for the remainder of 2023 to 2027 (shown in dark purple). As you can see, 2022 and 2023 have faced a rather abrupt increase in prices compared to other years, and so the value of the cover of a standard life insurance policy taken out in 2001 would not cover the same quantity of expenses in 2022, as it would have back then.
The same applies for the following Graph 2, which showcases the same levels of inflation, as calculated by the CPI.
Graph 1: Annual inflation rate of the Retail Price Index in the United Kingdom from 2000 to 2027 [6]
Graph 2: Annual inflation rate of the Consumer Price Index in the United Kingdom from 2000 to 2027 [7]
Increasing Term Insurance Example
You’ve popped out to the corner shop one Tuesday afternoon because you’ve got a hankering for chocolate. On your walk there you remember the good ol’ days, the days of 2005 when a Freddo cost no more than 10p. The shop door chimes as you walk in, smiling at the memory. Until you spot the Freddos – “just what I fancied!” – and your mouth drops, agape at the price staring back at you. 30p! It’s barbaric.
Halted in your tracks, you’re hit with the stark reminder that life is uncertain. Both money and time can change in an instant. You never know what’s around the corner when it comes to living – or the cost of it. Prices can increase, year by year, but you can never be sure how many years you’re even going to get. Right?
So just like that, you decide to take out an increasing term policy. With premiums starting at £20 a month, and a death benefit of £200,000 currently*, your insurance provider has set the increase rate of your premiums at 1.5 times the RPI.
Let’s say that one year after your policy has begun, the RPI is 3%, this means that next year, your pay out will have risen by 3%.
Cover: £200,000 x 3% (1.03) = £206,000
It also means that your premiums will have increased by 1.5 x 3% = 4.5%, so:
Premiums: £20 x 4.5% (1.045) = £20.90
| Beginning of the policy |
|---|
| Cover = £200,000 |
| Premiums = £20 |
| A year into the policy |
|---|
| Cover = £206,000 |
| Premiums = £20.90 |
For the year that follows, your increases will be calculated based on the increased cover and premiums for the current year, not the amounts you had at the beginning.
Most life insurers have a cap on the maximum increase that your cover can rise in one year, or it can be applied to the amount your cover can rise, overall. This is definitely something to be aware of when applying for increasing term insurance. Make sure you have enough money left over each month for the Freddos!
*This is an example of cover and premiums, and not a universal standard. The values are determined based on the age and health, etc, of the individual.
The results shown in the calculator are based on a representative example of a 30-year-old non-smoking woman with cover starting at £5 for £100,000 cover, over a 25 year term. The measure of increase used is an example flat rate of 5%.
Is Increasing Term Life Insurance right for me?
Protect Line prides itself on being an impartial brokerage, meaning we will never advise you on what is “right” or “wrong” for you: but will always endeavour to provide all the details you need to know about all types of life insurance cover so you can make an informed buying decision.
The Benefits of Increasing Term Insurance:
Increasing cover can help future proof your policy, meaning it’s worth as much in the future as it is the day you take the policy. It’s a plan designed to provide a cover amount that will still sufficiently cover any expenses – bills, rent, food shopping – even as the cost-of-living increases, because the sum-assured has increased in accordance. Indexed cover intends to combat any shifts in the economy, ensuring that the cover you might decide upon today retains the same value in the future. Increasing protection policy holders take out this plan to account for inflation.
And though, on paper, these tend to be more expensive policies than standard level term and decreasing insurance, due to the annual increases, they often start in the first year at similar premium prices to these other plans, and as these prices increase yearly, so does the cover, meaning that the more you’re paying in, the more you’d be getting from your policy.
As mentioned above, premiums can sometimes rise at a higher rate than the cover rises, but increasing term is still a cheaper policy than whole of life insurance for the same amount of cover.
Other reasons why increasing insurance is chosen include (the following list is not exhaustive):
- To aid in covering future funeral costs
- To account for the cost of living for their family/beneficiary
- To help pay off an interest-only mortgage
- To put towards future education
- To help your children get started on the property ladder
Below showcases the differences between increasing term, decreasing term and level term policies:
| Increasing term |
|---|
| Cover amount increases annually in line with inflation |
| Premiums increase each year |
| Designed to help protect you against the rise in living costs |
| Terminal illness is included |
| Critical illness cover can be added (at an additional cost) |
| Decreasing term |
|---|
| Cover amount decreases in line with a mortgage |
| Premiums remain fixed throughout the term of the policy |
| Designed to help cover a repayment mortgage (or other debts to be repaid) that reduces over time |
| Terminal illness is included |
| Critical illness cover can be added (at an additional cost) |
| Level term |
|---|
| Cover amount remains fixed throughout the term of the policy |
| Premiums remain fixed throughout the term of the policy |
| Designed to help cover the costs of mortgages, bills, family living, education, childcare, travel, inheritance and other daily life expenses |
| Terminal illness is included |
| Critical illness cover can be added (at an additional cost) |
How do I apply for increasing life insurance?
One way you can apply for increasing term life insurance is WITH US! Not to march in like an uninvited mariachi band, but we are dancing to the tune of your desires. You can add indexation to your policy as part of your quote if it is something that you’re after, because we are here to help you build the cover that matches your needs, as soon as you need it.
As one of the UK’s leading fee-free life insurance brokerages, protecting over 270,000 families since 2010 – we know our stuff. We’ve won awards in protection, because it’s who we are and what we do.
And we would love to do the same for you. We work with a panel of leading UK life insurers, many of which offer affordable increasing term insurance policies. Some of which include:
| Insurer | Percentage increase |
|---|---|
| 5% per year | |
 | Maximum 10% per year |
| RPI x 1.4% (up to a maximum of 14%) each year | |
| RPI x 1.5% (up to a maximum of 15%) each year | |
| Cover: increases by RPI each year Premiums: increases by RPI x 1.5 each year | |
| Minimum 2% each year, maximum 10% | |
| Between 0% to 10% each year, up to the age of 80 | |
| You choose between an increase in line with inflation, or a fixed 3% or 5% yearly |
Insurers update their terms and conditions from time to time and while Protect Line endeavours to keep all information up to date, there is a chance the information presented above regarding insurers and their indexation increases may become outdated. All information is correct at the time of publication. To ensure you fully understand the terms and conditions of your policy please read all your documents and contact us for clarification if there is something you do not understand. Your chosen insurer will also provide you with any increasing term information within your offer letter.
Taking out an increasing term policy with Protect Line couldn’t be simpler. Use our online quoting service to find a selection of increasing term policy options. Alternatively, a friendly chat with our specialist team will show you that increasing term is an option that is available during the call.
We’re a non-advisory service, so whilst we can’t offer you any advice, we can answer your questions with facts (not our opinions). And before long, you’ll have your life insured and future protected.
Can I change my existing insurance plan into an increasing term plan?
No, once your existing life insurance plan has begun, it cannot be changed into a new one. If you want to switch to an increasing term policy, you will have to cancel your existing cover, and get quotes on an increasing term plan that suits your needs. You will have to undergo the medical questioning to re-evaluate your health again, as your new coverage prices will be based on your health and lifestyle at the time of application.
However, it is important to note that your existing insurance plan can be amended slightly – not to a different type of plan, but certain variables, such as cover, might be able to be altered. Many providers allow you to increase your cover based on your life circumstances – a new child, a mortgage, a marriage – without being medically reassessed. These are life events that might mean you’re in need of a larger sum-assured, which is where the Guaranteed Insurability Option (GIO) comes in. This feature is included as standard for most insurers. It allows you to contact them and ask for an increase, without further action needed (though different insurers have different sets of rules surrounding their GIOs, so it’s always best to speak to them first).
Can I reject the increases to my policy?
Yes, you can reject the increases to your policy – however, you can only do so a handful of times. Most insurers only allow for you to decline their proposed annual increases two to three times before they consider removing the “increasing” option and instead switching you to a level term policy. The number of rejections you’re entitled to will depend on your chosen insurer.
What happens if I can’t afford the increase to my premiums?
If you’re unable to pay your risen premiums, or are unhappy with the increase, you can reject the increases to your policy when your insurance provider outlines the changes to you. However, if you accept the increases to your cover and premiums, only to later realise you can no longer afford those monthly fees, you won’t be able to change your mind and then decline them. If you can no longer afford premiums you can look to cancel your life insurance policy or make those payments, otherwise your policy will lapse, and you’ll be left without cover.
If you are struggling with your premiums or have questions about the affordability of the policy, you can discuss your needs and concerns with us at Protect Line to find an outcome that is best for you – and ensure that you are not left without any protection. We can help you find ways to reduce prices, or take out a new, more affordable policy entirely. A quick chat with Protect Line can help you keep your family covered.
What if I want increasing term life insurance AND decreasing term or level term?
Many people don’t realise when taking out a life insurance plan, but you can have multiple policies. You are more than entitled to apply for both increasing term insurance and any other policy you might seek.
Perhaps you want multiple policies to cover different purposes, for example, a decreasing term to cover a mortgage balance and an increasing or level term to leave an inheritance for your children so they can pay for further education or get on the property ladder. The cover you choose will be unique to own needs.
If you have multiple policies these would operate as separate policies. If you had two policies, you’ll have to pay two lots of monthly premiums over the duration of two terms (though you can choose to have the same term for each if you wish). This means that two separate cover amounts will be paid-out should you die during either policy, and your family will receive two pay-outs to put towards bills, mortgages, living-costs, travel, adventure, or providing a bulk batch of Freddos for your loved ones.
All because you protected them from every angle available. Think of yourself as being policy polygamous.
Key takeaways:
- Increasing term life insurance – otherwise known as indexation, or index-linked – is a life insurance option designed to increase your cover amount (and also your premiums) in line with inflation
- Increasing term life insurance increases are calculated dependent on the life insurance company, and are typically carried out by doing an annual review of your cover and altering it according to inflation
- An increasing term helps to protect the value of your policy against increasing costs due to inflation or cost of living rises. What that means in real terms is that, in the same way that things like clothes, food and petrol go up in price each year, so will the value of your policy.
- To the find an increasing term life insurance plan that best suits your needs, request a quote today to speak to a specialist (a friendly one with a smile so big, you can hear it down the phone).
- Plenty of insurers offer increasing term life policies, though their increase rates might vary
- Existing life cover that isn’t already an increasing term policy cannot be changed into one once that policy has begun. To change to increasing term, you will have to cancel your existing coverage and reapply – or talk to Protect Line to discuss your options!
- An increase to policy prices can be rejected, but after a certain number of rejections, the insurer can change you to a level term plan instead
References
- https://moneytothemasses.com/quick-savings/insurance-2/life-insurance/what-is-increasing-term-life-insurance-and-is-it-worth-it
- https://www.thetimes.co.uk/money-mentor/article/rpi-versus-cpi/
- https://www.icaew.com/library/research-guides/rpi-cpi-and-cpih
- https://www.icaew.com/library/research-guides/rpi-cpi-and-cpih#:~:text=In%20addition%20to%20the%20CPI,housing%20costs%20and%20Council%20Tax
- https://www.ons.gov.uk/economy/inflationandpriceindices/articles/ukconsumerpriceinflationbasketofgoodsandservices/2023
- https://www.statista.com/statistics/374890/rpi-rate-forecast-uk/
- https://www.statista.com/statistics/306720/cpi-rate-forecast-uk/