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How to Safeguard Your Life Insurance Against Inflation

Here’s what you need to know to limit the impact inflation has on your life insurance plan.

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

While this unpredictable phenomenon can wreak havoc on many of your assets, it can have particularly adverse effects on your 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 suffer greatly and be left with a fraction of the coverage they or you were expecting.

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When inflation strikes

Traditionally, the inflation rate in the United States is considered to be roughly 3 percent every year. While this doesn’t seem like much at first, even a subtle deviation from 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 percent less, making it more and more difficult to purchase anything. 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?

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Making Sense of Life Insurance

One of the best things you can do for your loved ones is to make sure they are protected and secure.

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 percent inflation rate. However, there’s no way for this approach to eliminate the damage done to the planned benefit of your policy. No matter what, your investment is going to take a hit, leaving you with a lesser benefit than intended or requiring you to exorbitantly increase the amount of money you pump into your policy. Thankfully, you do have some other options for how you can protect your life insurance from falling victim to the savagery of inflation.

What you can do for your life insurance

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 Retail 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, of course – that protects against inflation, often by providing a monthly benefit that increases each year to offset the economic conditions. Even now, such a clause is more popular among long-term care insurance but is steadily gaining momentum among life insurance companies. 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

Even though 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 the dangers that await you, 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!

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