Have you considered Inflation on Life Insurance?
You must have life insurance
cover and must be paying a fixed premium for the stipulated period of the policy while, the value of sum assured stays static. Whether one dies tomorrow or 20 years from now, his beneficiaries would still receive the same amount of insurance settlement. For this reason, choosing the right sum assured amount of term life insurance is more difficult because you have to estimate how big bite inflation will take out of the eventual benefit. Read also: How many life insurance policies should you have?
For instance, if you have bought a Rs 50 lakh term life insurance policy, as long as the premiums are paid it provides Rs50 lakh worth of coverage from the day you buy it until the day the term ends or it is paid out. Now, while assuming a 7% inflation rate over each of the ten years, your insurance policy would be worth at least 50% less by the time you reach the tenth year and with compounding the effect is even worse. So, after ten years an Rs50 lakh life insurance policy might only have the purchasing power of Rs25 lakh in today’s value. It means the amount of life insurance you buy today will not be worth the same amount ten years from now, due to devil Inflation.
Thus if you were counting on providing the equivalent of Rs50 lakh to your beneficiary and you lived ten years they would receive the Rs50 lakh all right, but would only be able to buy Rs25 lakh worth of stuff with it. Read also:Why Online Term Insurance Cheap?
Inflation adjusted Term Life Insurance Plans
Whilst considering the effect inflation may have on the value of your term life insurance, the calculations get even more complicated. We all know about the value of compounding interest on your various investments. But, what you may not be knowing the negative effect inflation can have on any term life insurance “payouts” that occur in the future. To get around this problem, some insurance companies offer inflation adjusted term life insurance plans where the cover increases by 5-10 % every year or is indexed to inflation or at certain stages of your life like when you marry or buy a new home or on the birth of a child or the first, third or fifth anniversary of policy purchase. As your sum assured would automatically increase in the coming years, it would take care of the increase in your income vis-a-vis inflation. But, are these plans worth for you? Take a look! Read also: Don’t buy Life Insurance, Buy adequate Cover!
Should you go for them?
Firstly, keep in mind that the premiums of such plans are higher than that of an ordinary plan. So, paying a higher premium for this benefit is not advisable. However, the future is not all bleak. Naturally, as years pass, your expenses will decrease after a certain point. Your children grow up and move out of the house reducing your expenses; you get the mortgage paid off, etc. As your own expenses are reduced, your need for additional life insurance coverage decreases, and your money, even with inflation taken into effect, may stretch a little further in the event of a life insurance payout. Also, hopefully your savings will increase as will the value of your investments, offsetting the effect that inflation may have on your ability to provide for your dependents after your demise. Read also: Methods for Estimating Life Insurance Needs!
So, a more cost-effective solution is to buy a simple plain vanilla term plan than go for complex offerings as the inflation-adjusted value of this sum is meager. Keep review your insurance needs at every life stage and add more cover if required. For hedging against the effects of inflation, you may buy additional coverage after every few years. Read also: Term Insurance-True protection for your loved ones!
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Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning
articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at email@example.com