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Does Higher Inflation Mean You Should Purchase Less Life Insurance?


High inflation can erode the value of your life insurance policy’s death benefit and other components of your policy, reducing your ability to financially help loved ones if you pass away while the policy is in force. But that doesn’t mean you should buy less life insurance. You can safeguard your policy against inflation with an inflation rider for a small additional cost. With that in mind, this article will explain how inflation impacts your policy and how a rider can protect your policy from inflation.

How does high inflation work?

Inflation is the process of dollars losing value. As a result, goods and services become more expensive because you need more dollars to buy them. It has many causes, such as more money circulating in the economy, higher demand, and lower supply. The Federal Reserve typically targets a 2% inflation rate. Anything significantly above 2% may be considered high inflation.

Higher inflation and life insurance coverage

High inflation impacts three portions of your life insurance coverage:

  • The death benefit
  • Your premiums
  • Your cash value

The death benefit

High inflation doesn’t change the dollar amount your death benefit pays out, but it changes the value of those dollars. For example, say you used a term life insurance calculator to figure out how much coverage you need, and decided on a term life insurance policy with a $500,000 death benefit. If annual inflation is 5%, and you pass away next year, your beneficiaries would still receive $500,000. However, that $500,000 would be worth less to your loved ones since inflation eroded some of its value. This means that inflation can reduce how far the money your loved ones receive can go if you pass away many years after getting the policy.

Your premiums

The good news about high inflation is that your premiums also become less valuable. For example, let’s say you have a term life insurance policy that costs $35 per month. You pay that same $35 every month, but inflation causes the value of that $35 to decrease. It may not be enough to outweigh the erosion in your death benefit’s value, but it slightly reduces those effects.

Your cash value

Permanent life insurance policies offer cash value growth components. Part of each premium you pay goes into this cash value component, which grows tax-deferred at a certain rate depending on the permanent policy type.

Once a policyholder grows their cash value enough, they can withdraw from it or borrow from it at good rates. They can also get their full cash value minus surrender charges if they surrender their policy.

Whole life insurance policy cash values grow at fixed interest rates. So, inflation can make it harder to grow the value of your cash value. You may be losing money if inflation becomes higher than your interest rate.

Indexed universal and variable life insurance policies let you invest in market indexes or specific stocks, bonds, and other assets. Inflation may affect specific investments differently, which could help or hurt your wealth-building opportunities.

How to combat inflation with a life insurance inflation rider

Inflation riders are life insurance riders that increase your death benefit by a fixed percentage — such as 3% to 5% — each year for a specific number of years. You pay slightly more in premiums, but the death benefit boost is often worth the cost.

For example, a $500,000 death benefit with a 5% inflation rider would initially increase to $525,000     .Then, it would increase an additional $25,000 each year for four more years, ultimately ending and remaining level at a total of $625,000.

     . This offers two benefits:

1. Protects your death benefit against inflation

The inflation rider increases your death benefit to reduce inflation’s effects and, depending on the inflation rate, match inflation. Meanwhile, your premiums will remain the same since they don’t increase year-over-year. This ensures that your loved ones receive the same value from your death benefit.

2. Provides more death benefit to your loved ones

You can also purchase an inflation rider to grow your death benefit if the inflation rate is low. This can offer your loved ones a larger payout if you pass away while the policy is in force. They can use this larger amount to adjust to increased living standards, cover extra debts, or put extra money toward their savings. This rider can be helpful on term life insurance and whole life insurance policies, since these policies typically don’t let you adjust your death benefit once you take one out.

Combat inflation with a life insurance rider

Inflation erodes the value of the dollar. This doesn’t just impact prices at the store — it can also affect many parts of your life insurance. Inflation causes death benefits to lose value and makes your fixed premiums cheaper. As for the cash value, that depends on the policy type and investments chosen.

Regardless, an inflation rider can help you reduce or eliminate inflation’s effects on your death benefit by raising it every year. If inflation cools, you can enjoy a growing death benefit that can help your beneficiaries further after you pass away.

So, there’s no need to scale back on life insurance purchases during high inflation. The inflation rider can help you get more coverage for a little extra. Still, shop around for quotes to save money on the coverage you need when inflation is high.

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