What is increasing term life insurance?

Key takeaways

• Increasing term life insurance is a type of life insurance where the amount paid out if you die amount rises over time

• A rising payout sum ensures the policy keeps pace with inflation, increasing the likelihood that your loved ones could cover essential bills if your die during the policy term

• 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 help 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

What is increasing term life insurance?

Increasing term insurance is a type of life insurance 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.

Increasing term life insurance is a good option if you're concerned about maintaining the real value of your life insurance cover over the long term.

How is increasing term life insurance different from decreasing life insurance?

As mentioned above, increasing term insurance is a type of term life cover where the payout amount goes up over time, helping to protect the value of the cover against inflation.

By 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 sum assured of £100,000 at a monthly premium of £10. If the RPI for the year is 3%, the sum assured would increase to £103,000.

Meanwhile, your premiums may also increase. For example, if premiums rise by a factor of 1.5 times the RPI, your monthly premium would increase by 4.5%, 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. Each year your payout 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?

As explained above, 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 or estate will increase.

Can I place my policy in trust?

Yes. An increasing term life insurance policy can usually be placed ‘in trust’ just like a level term or decreasing term life insurance policy.

This allows the payout to be passed directly to your chosen beneficiaries rather than forming part of your estate. This may help with inheritance tax planning.

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 upsides 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 will usually also go up, which can become expensive over time. Decreasing term insurance will typically 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 and no claim is made

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

Can I reject a premium increase?

Many insurers allow policyholders to decline proposed increases in cover and premiums - though the rules vary between providers. Importantly, this option can only be exercised a limited number of times after which the policy may lose its inflation-linking features and effectively operate as level term cover. Tread carefully before making any decision.

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. However, 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.

Note, though, as 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 where you’re worried the cost of future expense will rise over time, such as:

• Covering funeral costs – which may increase due to inflation

• Managing household bills and ongoing expenses

• Providing for dependents who may rely on your income for many years

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

• Other long-term financial commitment where the amount needed may increase over time

Comparing your life insurance options

At MoneySuperMarket, we specialise in helping you compare quotes for all types of life insurance, including both increasing term and decreasing term.

When comparing increasing term life insurance policies, be sure to focus on how the cover goes up over time. Some policies increase by a fixed percentage each year, while others are linked to inflation. It’s also worth checking whether there are any limits on annual increases and how these changes will affect your premiums over the life of the policy.

Beyond this, also consider the length of the policy term, any exclusions, and the insurer’s reputation for paying claims. Look for optional extras like critical illness cover or waiver of cover.

Comparing quotes from multiple insurers via MoneySuperMarket can help you find a policy that best fits your needs – and your budget.