With the the Consumer Price Index at highs last seen in the 1980s and stocks on Wall Street edging perilously further into bear market territory, inflation is on just about everyone’s mind these days. Indeed, according to a recent survey conducted by Gallup, nearly 1 in 5 Americans believe it’s the nation’s single biggest problem. This compares to an average of just 1% who felt it was the country’s main issue between 1990 and 2021.
While many individuals’ financial situation makes them less vulnerable to the effects of rising prices — such as having high net worth — everybody’s dollar buys less when the purchasing value of money weakens to the extent that it has. What’s more, the ramifications of inflation are truly all-encompassing — impacting everything from energy to grocery bills to interest rates to prices at the pump and more. It may even affect your retirement as well as your life insurance planning.
Life insurance may not seem like something you have to be too concerned about, given it’s not a cost that you’re necessarily dealing with on a day to day basis. But inflation is nonetheless something to be mindful of if you’re renewing your policy or have encountered a life event that warrants reviewing your coverage.
In what ways does inflation affect life insurance?
Inflation can affect life insurance in a number of ways — both in terms of how premiums are established and in the amount of coverage that policyholders opt to buy. From the insurer’s perspective, inflation affects life insurance through something called indexation. Indexation is a fiscal policy wherein the prices of any good or service are adjusted based on certain indicators, such as the Consumer Price Index, Average Earning Index or the Retail Price Index. The Consumer Price Index, which tracks price adjustments for various goods and services, has been on a steady rise for a number of months now, climbing 8.6% in May from a year ago, according to the Department of Labor. That’s the highest CPI since the 1980s.
Depending on what type of life insurance policy you have, insurers determine the direction in which premiums will rise or fall based upon one, two or a combination of several indices, including or in addition to those that we’ve just mentioned. In other words, if the Average Earnings Index, Retail Price Index and Consumer Price Index all edge higher, life insurance premiums likely will also. To what extent all depends on the rate of growth and the degree to which certain indices influence premiums.
Inflation can reduce spending power of death benefit
Another way in which inflation has the potential to influence your life insurance is in terms of how it affects the beneficiaries of your policy. Suppose, for example, that you have taken out a term life insurance policy with a $1 million death benefit and you bought this amount 30 years ago. If you were to die at or near the end of the policy’s term expiration date, $1 million will not go as far in today’s economic environment as it did in the early 1990s.
Of course, this isn’t all that surprising, considering the fact that inflation is a constant, historically rising roughly 2% each year. Thus, a dollar generally bought more 30, 20 or even 10 years ago than it does today. But in a hyperinflation environment such as the one that we’re now experiencing, a $1 million death benefit buys significantly less. For example, with an 8.6% inflation rate, what $1 million could purchase in 1992 would cost well over $2 million to buy in today’s dollars.
Inflation can cause you to buy less than what you actually need
Perhaps the most significant manner in which a weakened dollar influences life insurance planning is by causing you to skimp on coverage — or just letting your policy lapse. The natural inclination for many people when prices rise is to look for areas to save, whether it’s by buying less of something or cutting the cost out completely. But life insurance should definitely not be one of those things, especially if you have a family to support.
Few matters are more important to Americans than the health and overall welfare of their family. In fact, as a recent survey done by LIMRA shows, 82% of Americans point to their loved ones as their top priority, more than their physical health, mental health or finances. The poll also found that nearly 50% of respondents consider their family to be even more important to them than they were prior to the pandemic.
Among the best ways to financially protect your family is with a comprehensive life insurance policy in place — one that fully addresses all of their needs. In short, avoid the common trap of buying less when everything costs more.
How you can blunt the impact inflation has on life insurance
Ask for a policy rider: A policy rider is a clause that is built into or added onto your policy. You may have heard of riders for property insurance and business insurance policies, but life insurers offer them as well. If you’re renewing yours or purchasing an entirely new plan, ask about a policy rider. Having one in place can protect your policy against inflation adjustments.
Seek a cash value life insurance policy: With a cash value life insurance policy, your life insurance’s value grows over time through a combination of interest and dividends. Cash value protects you against inflation since it can increase the death benefit.
Add additional coverage: Talk to your insurer or agent about whether it makes sense to add more life insurance than what you have currently. They have a fiduciary responsibility to look after your best financial interests.
Whether you’re a business owner or individual that has a high value life insurance need, Leveraged Planning® makes a lot of sense if your dollar isn’t going as far as it has in the past. Contact Global Financial Distributors to learn more.