Impact of Inflation on Term Insurance Coverage Amount

The prices of daily essential things aren’t the same as it was 30 years before, and neither will they remain the same 30 years from now. 

Why? 

“Due to Inflation”

This is an important aspect to consider while doing financial planning, especially while buying term insurance, as its main usage will be to support you financially after 30 years. 

If you want to explore the impact of inflation on term insurance, then continue to read this blog till the end! 

But before diving into the main topic, first, we need to properly understand what inflation is.

So, let's start!

What Does Inflation Mean?

Inflation is the steady increase in the prices of goods and services over time. A high inflation rate lessens the purchasing power of money and makes it less valuable. In life insurance policies, where a fixed sum is assured, the rise in inflation diminishes the real value of the policy payout. 

In simple terms, the death benefit you thought would be adequate at the time of purchasing the insurance will no longer be enough to meet the financial needs of your family. 

What Is The Impact of Inflation On Term Insurance Coverage?

India has been going through a rise in inflation for many years now. The prices of goods and services are increasing each year, which is ultimately affecting the cost of living and purchasing power. The term insurance plans also gets affected by the same. Here are a few of the impacts of inflation on term insurance coverage. 

• Lessening purchasing power 

Imagine that the inflation rate will be up by 5% in the next few years. 

It will reduce your purchasing power. Let’s understand this with an example. 

Today, you can buy a life insurance policy with 1 crore cover at just Rs. 16/day. Will the premium be the same after 10 years? Absolutely, no! It will cost you 500+, ultimately decreasing your purchasing power. 

Also, a term insurance cover that is sufficient right now to meet the financial needs of your family will not be enough to support your family 40 years from now. As inflation has risen, it has lessened the power of purchasing. 

• The Varying Degree of Inflation 

The inflation rate of goods and services does not increase at the same rate. For example, the cost of education rises faster than the cost of vegetables and groceries. In 30 years from now, your child's higher education will cost you much more than the cost of any household items. 

• Increasing Cost of Liabilities 

The healthcare expenses of you and your family members will increase with time. Also, liabilities such as your children’s education and retirement plans will only increase your cost of living with time. All of these necessities need to be planned beforehand because inflation increases the cost of these liabilities much more.

• Increasing Premiums 

Inflation greatly affects insurance premium prices. 

Recently, a report by Business Standard was published stating that Private life insurance companies are likely to increase their term insurance premiums by 4-7%. 

Due to the increasing cost of living, these companies may increase the premium to account for the higher expenses and potential future claims. These higher premium payments further will make it difficult for policyholders to pay the premiums.

How To Choose The Right Term Insurance Plan To Beat Inflation?

Here are the factors that you need to keep in mind when selecting the ideal term insurance plan to protect your family in case of your sudden death or any grave illness. 

• Choose The Correct Type of Term Insurance 

If you want to beat inflation, then analyse all types of term insurance plans available and buy the one that best suits your needs. You can opt for a regular term return of premium, no-cost term insurance, or maybe increasing term plans. Any of these plans would help you be inflation-protected in the future. 

• Get a Term Plan That Offers a Large Life Cover 

It’s vital to analyse financial needs before getting a term insurance plan. Insurance with a large life cover will help your family during higher inflation. It may also help your family to pay off the remaining debt or any other expenses. 

• Choose a Plan That Has Life-Stage Benefits 

If your plan has life stage benefits, it will allow you to enhance life coverage at many important events of life. 

• Select a Plan That offers Special Benefits 

There are many special benefits, such as voluntary top-ups and riders in term insurance. So, select those insurance policies that have some extra facilities.

Conclusion

Term insurance will definitely help you deal with the challenges that inflation poses. It secures your family's financial situation, covers their future expenses, offers them peace of mind, and ensures that they are secured against potential uncertainty.

Frequently Asked Questions (FAQs)

Ques 1. What is the inflation factor in insurance?

Ans. The inflation factor is a standard measurement that the insurance industry uses to adjust coverage limits based on an expected rate of inflation. It varies by geographical area each year.

Ques 2. Does insurance take inflation into account?

Ans. Inflation affects insurance premiums. As the cost of living goes up, insurance companies may adjust their premiums to account for the higher expenses and potential future claims.

Ques 3. How does inflation affect short-term insurance?

Ans. In short-term insurance, there is a big impact due to losses on interest rate-sensitive investments. 

Ques 4. Can I adjust my term insurance coverage to keep up with inflation?

Ans. Some term insurance policies offer riders, such as cost-of-living adjustments, that allow you to increase coverage and keep up with inflation.

Ques 5. What is the best age to buy term life insurance?

Ans. Anyone between the ages of 18 to 65 can opt for term insurance policies.