It can be difficult to determine how much life insurance you require, especially with inflation continuing to drive up the cost per capita. They are more expensive today than they were 20 years ago. You might find that your policy doesn’t provide enough money for your family to purchase groceries or rent the future.
While we may not be able to prevent inflation, we can plan for it. You can be better prepared for the future by learning how to incorporate the economy into your insurance coverage.
Life insurance’s primary purpose is to provide financial security for those who depend on you. If your salary is sufficient to pay the mortgage, utilities bills, and school fees, life insurance can help you cover these expenses in case of your death. To calculate how much life insurance you will need, multiply your salary by a number of years. Add up all your debts. Also consider your daily expenses.
These calculations are important, but they don’t take into account inflation. If you purchase coverage through an agent, broker or other intermediary, they might factor in inflation. However, if you buy coverage online, you might have to factor in inflation.
This can be done by using historical averages. According to data from the Federal Reserve Bank of Minneapolis, the average annual inflation rate in the 20 years preceding the pandemic (2000-2019) was approximately 2%.
However, inflation doesn’t always rise at a steady pace. The consumer price index, which measures the average cost for goods and services, has risen 6% in the past year. According to Tanya Frias (chief financial planning officer at Freeman Capital), the current rate is a significant gap if you include a rate of 2.2% in your coverage calculation.
Frias suggests that you can combat this by using an inflation rate that suits your needs. A custom plan can be created based on your policy type, policy length, and financial obligations. Planning for 6% inflation per year may not be feasible for policies that are expected to last for 30 years. However, it might be possible for coverage that will pay in the near future.
Consider the expenses that you would like the policy to cover. Fixed mortgage payments aren’t affected as much by inflation while other costs like groceries or utilities can change dramatically over time. Talk to an agent or fee only life insurance advisor to determine the best rate for you.
A cost-of-living rider
Lauren Wybar, senior wealth advisor at Vanguard Personal Advisor Services, says that there are riders that can help protect against external factors such as inflation. A cost-of living rider, which increases the death benefit according to the consumer price index (a measure of inflation), is a good example. Your premiums will rise along with any coverage increases. Inflation riders are not available from all companies and costs may vary between insurers.
Buying new policies during high inflation
Wybar states that new life insurance policies could be more expensive than other products in severe inflation. Waiting for prices to stabilize is not the best option. Wybar states that there is always a risk of waiting. We don’t know how inflationary prices will last, so if anything happens in the interim, it is likely that you would have been better to get a policy.
Frias recommends that you have a minimum of a term policy, with the possibility to convert later. You can change the policy to permanent coverage at any time without having to reapply or undergo a medical exam. Term life insurance, which lasts for a fixed amount of time, is the most affordable type of coverage. Although it doesn’t have cash value like whole-life insurance, the premiums are lower so you can get temporary, affordable coverage even if your costs are high.
Regularly assess your coverage
Wybar suggests that you review your policy every year as part of a financial health check. You may have to increase your coverage if you experience a major life event such as a marriage, buying a house or having children. You may also want to reduce your death benefit if the coverage you are using is not necessary. Talk to an agent or advisor in life insurance about how the new amount should adjust for inflation when you adjust the policy’s face.