inflation chart

How to Safeguard Your Life Insurance Against Inflation

Considering the fickle nature of the economy, perhaps one of the biggest long-term threats to your life insurance is inflation.

As of the most recent update of this post, the United States inflation rate is at a 41-year high, and has already beaten its record within the year.

While this often unpredictable economic change can wreak havoc on many of your assets, it can have particularly adverse effects on life insurance holdings. After all, the entire premise of the industry is predicated on planning out how much financial protection you’ll need, often many years in advance, taking into account the changing economic climate. So, if inflation takes an unexpected turn, your loved ones could possibly be left with less than expected.

When Inflation Strikes

To put it into perspective, the inflation rate in the U.S. is typically around 3% every year. While this doesn’t seem like much at first, even a subtle deviation in this increase can have far-reaching effects over the course of a decade or two. Think about it: With every year, the money in your pocket is worth 3% less.

And in June of 2022, the consumer price index – one of the primary measures of inflation – accelerated to 9.1%.

How, then, can you expect to anticipate whether the investment you’re making into your life insurance policy will be significant enough to provide your family with the safeguard they need?

The tricky part is that you can’t. Sure, you can do the calculations upfront and determine what your policy’s ultimate total should be down the line, accounting for perhaps slightly higher than the expected 3% inflation rate. However, there’s no way for this approach to eliminate any potential damage done to the planned benefit of your policy. Thankfully, there are other options for how you can protect your life insurance from the unfortunate reality of inflation.

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What You Can Do

Inflation is inevitable, but here are a few strategies you can put into practice to help prevent it from dismantling the long-term vision of your life insurance policy:

  • Indexation: Some life insurance companies will allow you to exercise this option, which links your premiums with any number of figures intrinsically tied to inflation, such as the consumer price index and the average earnings index. As a result, your policy stays on par with the economy as inflation naturally occurs, retaining its long-term cash value over the course of many years. The catch is that indexation usually needs to be activated at the very beginning of your policy. After your plan begins, you may no longer have access to this option. So consider carefully if you want to add it to your plan before signing on the dotted line.
  • Policy riders: A policy rider is a clause built into your policy that provides extra protection or includes some other customized benefit that does not factor into a standard plan. In this case, some life insurance companies will offer one at an additional cost that protects against inflation, often by providing a monthly benefit that increases each year to offset the economic conditions. Ask your provider if such an option exists on your policy. As always, it’s much easier to make these decisions when starting a new plan.
  • Periodic coverage boosts: Less elegant than the above two solutions, this one merely entails injecting additional coverage into your policy on a regular basis to keep up with inflationary needs. The exact details of how you decide to do that are naturally completely up to you. Perhaps you may opt to devote additional funds to an existing plan or maybe even purchase an entirely new term policy to extend your coverage further into the future. The choice is yours, but this may be a more reliable option than factoring the inflation rate into your long-term life insurance needs in one fell swoop, as it at least gives you the option of course-correcting along the way.

An Uncertain Road

Although it may seem futile at times, estimating the impact that inflation will cumulatively have on your life insurance plan is a critical part of planning your financial future. Your policy is designed to be a safety net to protect your family in your absence, and without doing your absolute best to assess possible threats, it’s impossible to fortify the structure of your policy to provide the best possible security available to you. Inflation protection is an essential part of your plan’s long-term success, so don’t delay in taking the necessary precautions.

Do you still have concerns about how inflation may affect your life insurance policy? Let us know in the comment section so that we can help!

Discuss your options with a AAA insurance agent today.

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