How Does Inflation Affect Life Insurance?

Supply and demand drive our economy. But when these two variables become misaligned, something must give. Inflation will likely follow if the supply of money increases too fast or a particular good or service becomes scarce. And when inflation creates significant increases in prices, owners of life insurance policies should notice.

What is Inflation?

We all experience inflation. Inflation is when the general cost of goods and services steadily increases. Without a similar rise in wages and income, the same dollar today will purchase less of the same goods and services tomorrow.

Our Federal Reserve attempts to keep inflation around 2% annually by altering the money supply. However, historically, the U.S. economy has seen inflation average just over 3% per year. The worst year of inflation occurred after WWII, when the average cost of goods and services climbed more than 18%.

Inflation’s Impact on Life Insurance

When it comes to the impacts inflation has on your life insurance policy, the most significant is the erosion of the death benefit’s buying power. For example, if you purchase a 30-year term policy worth $1,000,000 today, its buying power could dwindle to just $412,000 by the time the contract expires.

Fortunately, there are several options to help combat inflation’s effect on your coverage:

Indexing: A few life insurance policies will automatically increase your death benefit by a metric tied to inflation, such as Consumer Price Index (CPI).

Inflation Riders: Riders add additional coverage to your policy. An inflation rider can increase the policy limits on a scheduled basis by a fixed percentage (usually 2% or 3%) to offset a rise in inflation.

Coverage Boost: Some insurance companies allow you to increase coverage with little to no medical underwriting to help battle inflation.

Inflation's ability to zap the dollar's value means it is vital to review your policy annually. Each review provides an opportunity to reassess whether the death benefit purchased initially will continue to be enough. If it is time to review whether your life insurance has kept up with inflation, contact my office today.