It can be difficult to determine how much life insurance you need, especially as inflation drives up the cost of living. Gas, housing, and eggs are far more expensive today than they were 20 years ago. If you buy a policy based on current prices, it may not be enough for your family to buy groceries or pay the rent in the future.
We may not be able to escape inflation, but we can plan for it. Learning to include the economy into your coverage will help you stay more prepared.Â
Calculate for inflation
The basic goal of life insurance is to offer financial security for everyone who relies on you. For example, if your paycheck pays your mortgage, energy bills, and school fees, a life insurance policy will cover those costs if you die. Calculating how much life insurance you need may involve multiplying your wage by a specific number of years, adding up your debts, and taking into account all of your present daily expenses.
These computations are necessary, but they do not account for inflation. When you get coverage from a life insurance agent or broker, they may figure in inflation for you. However, if you buy coverage online, you may need to consider this yourself.Â
A basic method for accomplishing this is to use historical averages. According to data collected by the Federal Reserve Bank of Minneapolis, the average annual inflation rate in the 20 years preceding the pandemic (2000-2019) was around 2%.
However, inflation does not necessarily increase at a consistent rate. For example, the consumer price index, which measures the average cost of goods and services, rose 8% in 2022 and another 4% in 2023. So, if you factored in a 2% rate while calculating your coverage, the current rates may seem like a tremendous difference.Â
One method to combat this is to choose an inflation rate that is appropriate for your needs. Your policy type, policy length, and financial commitments can all help you create a personalized strategy. For example, preparing for 8% yearly inflation may not be realistic for a policy that you expect to last 30 years, but it may be appropriate for short-term coverage that will pay out in the coming years.
Consider what types of expenses you want the coverage to cover. Some costs, such as fixed mortgage payments, are less affected by inflation, whilst others, such as food and utilities, can fluctuate dramatically over time. Speak with an agent or fee-only life insurance advisor to determine the best pricing for your needs.
Consider whether your requirements for life insurance may vary over time. If you intend to purchase a home or have children, you may require additional coverage in the future. As your mortgage is paid off and your children grow into self-sufficient adults, your need for life insurance may decrease, making inflation less of an issue.
Consider a cost-of-living rider
If you’re purchasing a new policy, a cost-of-living rider might help keep your coverage current with inflation. This rider, which is an optional add-on when purchasing a policy, often increases the death benefit in step with the consumer price index. As a result, any increases in coverage amount will cause your rates to rise. However, not all businesses provide inflation riders, and the cost may vary per insurance.Â
Buying a new policy during high inflation
New life insurance plans, like other consumer products, may become more expensive during periods of high inflation. However, waiting until prices stabilize is not always the best strategy. If you die without insurance, everyone who relies on your income may be left in a financial problem.
Term life insurance, the cheapest sort of coverage, is likely all you require. It lasts for a set number of years and does not accumulate capital value like whole life insurance, but the reduced premiums allow you to obtain cheap, temporary coverage when prices are high.
Reassess your coverage regularly
It’s a good idea to assess your insurance every year as part of a routine financial health check. For example, if you experience a significant life event, such as purchasing a home, marrying, or having children, you may need to boost your coverage. Similarly, you may wish to reduce your death benefit if you no longer require as much coverage. When adjusting the policy’s face value, consult with an agent or life insurance specialist to determine how the new amount should be adjusted for inflation.
