What is increasing term life insurance?

Key takeaways

• Increasing term life insurance is a type of life insurance where the payout amount rises over time.

• A rising payout sum ensures the policy keeps pace with inflation, offering peace of mind that rising bills can be covered

• As the potential payout increases, so do your premiums, typically at a rate predetermined by the insurer

• The payout is paid to beneficiaries named on the policy, with the idea that it will pay mortgage costs, other household bills and provide for dependants, offering financial security

• Increasing term life insurance is more expensive than level-term insurance but is usually cheaper than whole of life insurance (life assurance)

What is increasing term life insurance?

Increasing term insurance is a type of policy where the payout amount (also known as the sum assured) rises over time - usually in line with inflation or by a fixed percentage each year.

This helps ensure that the value of the payout keeps up with the cost of living, so your loved ones aren’t left with a benefit that’s worth less in real terms.

In the UK, an increasing term policy is often linked to the Retail Prices Index (RPI). While premiums typically start lower with this type of cover, they increase over time as the payout amount grows. It's a good option if you're concerned about long-term financial protection keeping pace with inflation.

Understanding increasing term life insurance

The idea behind increasing term life insurance is straightforward: as the cost of living rises, so should your amount of life insurance cover.

This is typically reviewed on an annual basis, with the pay-out amount adjusting in accordance with the Retail Price Index (RPI), a common measure of inflation. Your premiums will also rise, generally at a rate predetermined by the insurance provider.

In contrast, decreasing life insurance is a type of term life cover where the payout amount reduces over time, usually in line with a repayment mortgage or other declining debt.

How do the increases work?

Here’s an example. Imagine you've secured a policy with an initial benefit of £100,000 at a monthly premium of £10. If the RPI for the year is 3%, your policy's benefit would increase to £103,000. Meanwhile, your premiums would climb by a factor of 1.5 times the RPI, resulting in a new monthly premium of £10.45. Each subsequent year, these new figures become the baseline for further adjustments.

How these increases are done will depend on your provider and the amount of cover. The usual method is an annual review of your cover. Each year your pay-out will be increased in line with the Retail Price Index (RPI) and your premiums will be increased as well at a rate determined by your provider.

How does the cover increase?

With increasing term life insurance, the cover amount (or sum assured) rises each year to help protect against inflation.

This means that if you die during the term, the lump sum paid out to your beneficiaries will increase.

Your life insurance policy can also be placed in a trust.

What extra cover can I add to life insurance?

When buying life insurance, you can often add extra cover for an additional cost to tailor your policy to your needs. Common options include:

What are the positive factors of increasing term life insurance?

You should consider buying increasing term life insurance if you want your life cover to keep pace with inflation and rising living costs, ensuring your loved ones receive a payout that maintains its real value over time.

It’s especially useful if your financial commitments, such as a repayment mortgage, are likely to grow during the policy term.

Does increasing term life insurance have any limitations?

Increasing cover offers valuable inflation protection, but it also comes with some limitations to consider:

• Rising premiums – As the cover amount increases each year, your monthly premiums also go up, which can become expensive over time. Decreasing term insurance will be cheaper

• Fixed increase limits – If your policy is tied to inflation (e.g. RPI), insurers often cap the maximum annual increase (commonly around 10%), which may not fully match high inflation rates.

• No payout if you outlive the term – Like other term policies, increasing term cover only pays out if you die within the term; there’s no return on premiums if you survive the policy period.

• Complexity – It can be harder to understand or predict how much the cover and premiums will rise over time, especially if linked to inflation.

• Limited availability – Not all insurers offer this type of policy, and some may have stricter eligibility criteria.

Can I reject a premium increase?

Policyholders have the right to reject a proposed increase in premiums put forward by insurance companies. However, this option can only be exercised a limited number of times before the policy may revert to a level-term life insurance policy.

What happens if I can’t afford higher premiums?

If you decide you no longer want to pay higher premiums, you might be able to switch to a level term policy with a fixed payout and stable premiums, but this often means reducing your cover or starting a new policy. It’s important to read the policy details carefully and discuss options with your insurer before the increases begin.

Is increasing life insurance right for me?

Increasing life insurance can be a good choice if you’re concerned about inflation eroding the value of your payout over time or if your financial responsibilities - like mortgage payments or childcare costs - are likely to rise.

It helps ensure that the amount your loved ones receive keeps pace with the cost of living.

However, because premiums increase each year, it may become more expensive than level term insurance in the long run.

If you prefer predictable, stable payments or have a fixed financial commitment, a level term policy might be more suitable. Ultimately, it depends on your personal finances, future plans, and budget.

When is increasing life insurance useful?

This type of policy can be particularly useful in scenarios such as:

• Covering funeral costs

• Managing family bills and ongoing expenses

• Providing for dependents

• Supporting children's education or helping with a first home purchase

Comparing your options

At MoneySuperMarket, we specialise in helping you compare quotes for increasing term life insurance and decreasing term life insurance.

When comparing getting a life insurance quote, focus on how the cover increases - whether by a fixed percentage or linked to inflation - and check for any caps on these increases. Understand how your premiums will change over time and compare initial costs, since premiums usually start lower but rise as the cover increases.

Also, consider the policy term, any exclusions, and the insurer’s reputation for paying claims. Look for optional extras like critical illness cover, and use comparison websites or brokers to help find the best policy that fits your needs and budget.