How to increase your life insurance cover

Change is the only constant in life, which is why it is essential to review our life insurance coverage as circumstances evolve over time. The review is not necessarily required monthly or yearly; instead, we can assess our insurance coverage when we reach certain milestones in our lives. Some of the important life events that can require you to bump your insurance coverage are:

• When you get married.
  
• If your spouse is not working and is financially dependent on you.
  
• When you have kids.
  
• If your income has increased significantly and your standard of living has gone up (think higher dining bills, overseas vacations). You'd need to ensure your loved ones can maintain this lifestyle in your absence.
  
• If you have taken a significant, long-term loan (home loan, education loan, etc.). Often, lenders urge you to buy a life insurance plan along with the loan, known as loan protection plan. But stay away from them as they are expensive, lack flexibility and serve the interests of the loan provider, not yours.

How much insurance do you need?

It all depends on you. You'll get your answer by asking yourself this question: "How much money will my loved ones need if I am not around?"

This question can help you list down your monthly expenses. From grocery to schooling, home loan repayment to lifestyle costs, you'd need to add them all up and multiply it by 20 or 25 (the number of years you think your family would need financial assistance).

Now that you know the importance of evaluating your insurance coverage, let's understand how you can do so easily and, if you are lucky, cost-effectively.

Increasing insurance cover

Broadly speaking, there are four ways to bump up your coverage:

Option 1: Top up your plan

Many term plans - which is the best type of life insurance available in the market - come with a top-up plan. These plans are sensitive to your ever-changing needs. Increasing your life coverage by topping up your existing plan is generally the most-effective route.

Things to remember
Check if you have an increasing term plan. If you do, this plan automatically increases the coverage each year. You won't have to increase the coverage manually. There's one drawback, though. Your insurance premium also increases each year.

What if you have a life-stage growth term plan? In this case, your coverage increases each time you hit a personal milestone. It can be marriage or extension of your family.

Having said that, some term plans don't have the 'top-up' facility. In that case, you'd have to explore other options.

Option 2: Buy a new term plan

You can choose to buy a new term plan with additional riders. However, paying a separate premium is not only more expensive (compared to Option 1), but also requires additional paperwork. Selecting a new plan also has its hassles, not to mention the need to undergo fresh medical tests. (Bear in mind, even with top-up term plans, you may be asked to undergo a few health exams).

Things to remember
Inform both the insurance companies you have bought a second life plan. Otherwise, there may be problems at the time of making a claim.

Option 3: Convert the term plan into a whole life insurance policy

A whole life insurance is a permanent policy, meaning your loved ones can receive death benefits even if you live for a hundred years. On the other hand, a term plan only provides coverage for a fixed number of years. If you outlive the term plan, your loved ones will not receive any benefits.

The second advantage is that you can increase your coverage under a whole life insurance policy. What's more, the cost of converting a term plan to a whole life insurance policy requires minimal fees. These policies also provide cash value, which can be withdrawn later.

But there are multiple drawbacks too. First, very few Indian insurers offer such policies, so the option to convert your term plan is non-existent. Second, if you dig deep, you'd notice their premiums are expensive. Third, most of us don't need to financially secure our loved ones their whole lives. And finally, the cash value provided by whole life policies attracts tax and can make you pay even higher premiums.

Our take
Avoid whole life insurance policies. They are expensive and complex.

Option 4: Add riders to your existing plan

Adding riders to your existing term plan is a relatively inexpensive way to increase life coverage. Some of the popular riders are:

• Accidental death benefit: You can purchase this rider at a fairly affordable price. For instance, a Rs 20 lakh accidental death rider costs somewhere around Rs 1,000 annually for a 30-year-old.
  
• Permanent or total disability rider: This feature can secure your family's financial needs if you are physically unable to continue your employment. In this case, you may have to pay Rs 300 each year for a Rs 10 lakh coverage, provided you are 30.
  
• Critical illness rider: This feature can be helpful if you need a sizable amount to treat a critical illness. However, that critical illness must be mentioned in the policy beforehand. For a 30-year-old, a Rs 10 lakh critical illness rider will roughly cost an additional Rs 3,000 each year.

Other riders are also available, but they differ from policy to policy. You should check with your insurer.

Things to remember
You can buy multiple riders. The premium of critical illness or other health-related riders should not exceed 100 per cent of the base policy premium.

The premium of the other riders should not exceed 30 per cent of the original policy premium.

What you should do

Topping up your coverage or adding riders are the easiest ways to increase your policy coverage.

Suggested read: Here's how you can surrender your life insurance policy

This article was originally published on August 22, 2023.