What is increasing term life insurance in Canada: How it works & when to consider it

Some people worry that inflation or rising family costs could erode the value of their coverage over time. That’s where increasing term life insurance in Canada comes in.

By allowing your coverage amount to grow, increasing term life insurance can help provide financial security for your loved ones, ensuring that your protection keeps pace with rising expenses.

It’s designed for people whose financial responsibilities grow, like young families, homeowners, or those planning for future education expenses. In this guide, you’ll learn how increasing term coverage works, when it makes sense, and whether the higher premiums are worth it compared to level term insurance.

What is increasing-term life insurance?

Increasing term life insurance is a type of term life insurance policy where the policy’s death benefit (the amount paid to the beneficiaries upon the insured person’s death) increases over time, unlike the fixed death benefit found in most term life insurance policies, which remains constant throughout the policy’s duration.

With increasing-term insurance, the policy’s death benefit typically increases annually or at specified intervals according to a predetermined rate or formula. The rate of increase may be fixed or tied to a specific factor, such as inflation or a percentage increase. The policy’s duration is typically set at the outset and determines how long the increasing coverage applies. The policyholder pays premiums based on the initial coverage amount and the expected growth rate. Some insurers, however, limit the total increases in death benefit for these policies, so it’s essential to review the terms carefully.

Compared to other term life insurance policies, which generally offer a fixed death benefit for a fixed period, increasing term life insurance provides a growing benefit to help address inflation and changing financial needs. When considering increasing-term insurance or any other life insurance policies, individuals should review all policy details to ensure the coverage aligns with their financial plans.

Premiums for increasing-term policies may vary during the policy term based on your policy. These policies have higher premiums compared to level-term policies to account for the increased death benefit that grows over time. Individuals considering increasing-term insurance should confirm whether premium increases apply before purchasing to ensure the policy aligns with their financial plans.

Why get increasing-term insurance?

Increasing term insurance ensures that the policy’s death benefit keeps pace with inflation and the insured’s changing financial responsibilities. This type of policy can help address evolving insurance needs, such as covering outstanding debts and rising living expenses that may increase over time.

As time passes, financial obligations may increase, such as expenses related to a mortgage, education, or other financial responsibilities. When considering an increasing-term policy, it’s important to evaluate how much coverage you need by factoring in ongoing living expenses, outstanding debts, and your family’s future financial needs. Be sure to review the available coverage options to select a policy that best fits your situation. An increasing-term policy provides a higher payout to beneficiaries as time passes, offering excellent protection against rising living costs and financial obligations.

Increasing-term insurance requires you to pay higher premiums compared to level-term insurance to account for the possibility of a more considerable death benefit in the future.

Advantages and disadvantages of increasing-term insurance

Increasing-term insurance offers advantages such as customizable coverage with various coverage options to suit different financial situations and affordable premiums initially. However, it comes with the drawbacks of much higher premiums over time, limited duration, and potential redundancy if financial situations improve.

Pros of increasing-term insurance:

• Increasing death benefits keeps coverage aligned with rising costs of living.
• Flexibility to adjust death benefit growth rate and policy duration to suit changing needs without additional underwriting.
• Lower premiums initially for increasing term insurance, providing early budget-friendly coverage.
• Growing death benefits offer increased financial protection as responsibilities evolve (e.g., marriage, children, home purchase).

Cons of increasing-term insurance:

• Higher premiums over time: As the death benefit increases, the premiums for increasing-term insurance also rise. This can make the policy more expensive in the later years, especially if the rate of increase is significant.
• Changing financial circumstances: If your financial situation improves or stabilizes over time, you may find that increasing death benefits and higher premiums are no longer necessary, making a level-term policy more suitable and cost-effective.
• Hard to find: The availability and ease of finding this type of insurance may be difficult depending on the specific insurance company and its product offerings.

How does increasing-term insurance work?

Increasing life insurance is a category of policies where the death benefit grows over time to help meet evolving financial needs. Increasing-term insurance is a type of increasing life insurance that provides coverage for a fixed period, meaning a specific, predetermined length of time. During this fixed period, the death benefit remains constant or increases according to the policy terms, and the policy expires once the term ends unless renewed or converted.

Increasing-term Insurance works by gradually increasing the death benefit over the policy’s fixed period. There are two common approaches to increasing the rate.

• Percentage increase
• The death benefit increases by a predetermined percentage each year. For example, the policy may have a 5% annual increase, resulting in higher coverage over time.
• Suppose you have an increasing-term insurance policy with a 5% annual increase. Initially, your policy has a death benefit of $100,000. After the first year, the death benefit would increase by 5% to $105,000.
• In the second year, it would increase by 5% to $110,250. This gradual increase continues throughout the fixed period, providing coverage that keeps pace with inflation and rising costs.
• The premiums will generally increase proportionally with the growing death benefit. For example, if the death benefit increases by 5% each year, the premiums may also increase by a similar percentage annually.
• Flat rate increase
• The death benefit increases by a fixed amount each year. For instance, the policy may have a $10,000 annual increase, providing consistent growth in coverage.
• Consider an increasing-term insurance policy with a $10,000 annual flat rate increase. Initially, your policy has a death benefit of $100,000. After the first year, the death benefit would increase by $10,000 to $110,000.
• In the second year, it would increase by another $10,000, resulting in a death benefit of $120,000. This fixed amount increase continues each year, providing a predictable growth in coverage regardless of inflation or percentage changes.

With a flat rate increase, the premiums may increase more compared to a percentage increase. Since the death benefit grows by a fixed amount each year, the premiums must account for that additional coverage, potentially resulting in more extensive premium hikes over time.

When the insured passes away during the fixed period, the beneficiaries receive a lump sum payment from the policy. This lump sum is typically tax-free and can be used to cover debts, funeral costs, or provide an inheritance, serving as a crucial financial safety net.

Premiums for increasing-term insurance

Premiums for increasing-term insurance typically work based on the death benefit increases over time. As the death benefit grows, the premiums also rise to accommodate the higher coverage amount. There are two standard methods for determining the premium increase. If you apply for additional coverage or convert your policy, medical underwriting may be required, which can impact your premiums.

Here’s an example table showcasing the cost of premiums for increasing-term Insurance with both percentage and flat rate increase options over a 10-year policy term.

Increasing-term insurance vs. Level-term insurance

Both increasing-term and level-term are types of term life insurance policies, each with distinct features. Level-term insurance offers a fixed premium amount for the entire policy duration, providing predictability and stability in terms of cost. In contrast, increasing-term insurance allows for potential increases in the death benefit and corresponding premium amounts.

Is increasing-term life insurance worth it?

Level-term life insurance is often considered better than increasing-term life insurance because, with a level term, the death benefit remains the same throughout the policy term, providing consistent coverage. In contrast, increasing-term policies typically come with rising premiums over time, making the level-term more predictable and cost-effective for many individuals.

Level-term life insurance offers stable premiums, consistent coverage, and cost-effective protection and is often preferred due to its affordability, predictability, and simplicity.

Using riders with level-term life insurance to increase your life insurance coverage

With level-term life insurance, the coverage amount stays the same over the policy term. If you prefer flexibility for increasing coverage in the future, consider the following riders instead of choosing an increasing-term life insurance policy. When using a conversion rider to switch from term to permanent life insurance, you may gain access to a cash value component, which is not available in standard term policies.

Guaranteed insurability rider

With a guaranteed insurability rider, you can purchase additional coverage at specific intervals without undergoing additional underwriting. It allows you to increase your coverage at predetermined times, such as every three or five years, or during significant life events like marriage or the birth of a child.

Conversion rider

A conversion rider allows you to convert your level-term policy into a permanent life insurance policy without undergoing a medical exam. This will enable you to extend your coverage and potentially increase the death benefit.

Accelerated death benefit rider

The accelerated death benefit rider allows you to receive a portion of the death benefit if you are diagnosed with a terminal illness or a qualifying medical condition. It can provide financial assistance during a challenging time and potentially free up funds for medical expenses.

Does increasing term adjust for inflation or CPI?

Some increasing-term policies are linked to inflation (CPI), while others use a fixed annual percentage such as 3%, 4%, or 5%. CPI-linked options automatically adjust based on inflation rates, helping your death benefit maintain purchasing power over time.

Fixed-rate increases provide predictability but may lag behind real inflation if the economy changes. Either way, the intent is to ensure your life insurance keeps up with the rising cost of living, something standard level-term coverage does not do.

Can riders replace the need for increasing term?

In many cases, yes. Instead of buying increasing term, you can add riders to a level term policy that expand coverage over time. A guaranteed insurability rider lets you purchase additional coverage at certain milestones, like marriage or having a child, without another medical exam.

A conversion rider allows you to switch to permanent insurance later, and an accelerated death benefit rider provides early payouts in case of terminal illness. These riders often provide the same flexibility as increasing-term coverage, but with lower costs and simpler management.

Importance of reviewing and updating your increasing term life insurance policy

Regularly reviewing and updating your increasing term life insurance policy is essential to ensure your life insurance coverage keeps pace with your evolving financial needs and responsibilities. As life changes, whether you welcome a new child, take on a larger mortgage, or experience a shift in income, your term life insurance policy should adapt to provide the right level of financial protection for your loved ones.

Increasing term life insurance is designed to offer a growing death benefit, helping your policy’s value keep up with inflation and rising living costs. However, it’s important to check that the benefit increases are still sufficient to maintain your intended standard of living for your beneficiaries. Over time, inflation can erode the purchasing power of your death benefit, so periodic reviews help ensure your coverage amount remains adequate.

Your financial responsibilities may also change. For example, you might accumulate more debt, such as a new home loan or additional credit cards, or your family’s needs may expand. In these cases, you may want to purchase additional coverage or adjust your policy to provide a larger death benefit. Conversely, if your debts decrease or your children become financially independent, you might find that you need less coverage.

Lifestyle habits and health changes can also impact your life insurance premiums and eligibility for lower premiums. Positive changes, like quitting smoking or improving your health, could qualify you for reduced rates or more insurance coverage. On the other hand, if your health declines, you may need to consider whether your current policy still meets your needs or if switching to a permanent life insurance policy is a better fit.

Increasing term life insurance in Canada – Conclusion

Increasing term life insurance is built to evolve with your financial life, but that flexibility comes at a higher cost over time. For many Canadians, a well-sized level term policy paired with smart riders can deliver similar peace of mind with fewer premium surprises.

If your needs are likely to grow gradually, consider starting with level term and adding a guaranteed insurability option so you can boost coverage later without new medicals. If you expect long-term obligations or want estate planning benefits, review conversion options early so you can pivot to permanent coverage on your timeline. The right path depends on budget, health, and how long you need protection.

Frequently asked questions about increasing term life-insurance