Inflation is at an all time –high these days. As a result, the cost of living has soared and the prices of essential commodities too have peaked .One element that few people tend to think about while considering inflation is the impact rising inflation has on one insurance needs. While the rules of thumb state that you should look at life cover of around 10times your annual income (after deducting your investment asset plus any liabilities), it’s also important to consider the impact of increasing inflation on your insurance portfolio.
Inflation refer to the general rise in prices measured against a standard level of purchasing power .The most well known measure of inflation are the consumer prices index (CPI), Which measure consumer prices ,and the GDP deflator ,which measure inflation in the domestic economy .From 1969 to 2010,the average inflation rate in India was 7.99 percent. So for instance, anything that could be purchased for 10lakh in 2011 would cost approximately 45lakh in 2031at eight percent inflation rate.
With respect a insurance, thought inflation also cause premium rates to rise, The most significant factor for consumer is the reduction is value of the benefit amount, For example a person who buys a life insurance policy of 10lakh may find that this coverage does not serve the purpose when s/he needs it. Thought 10lakh may have been sufficient amount at the time of purchase, s/he may not use the coverage for 20years.Finally when the insurance benefit may not be enough.
With the passage of time, yours family’s needs are bound to increase .Unforeseen events do occur, and all individuals wish that their family can sustain the same lifestyle even when they are not around to provide for them .Unless you are purchasing a term life insurance policy for a three five year period ,Inflation is sure to catch up. It is for the reason that the further value of money should figure in your calculations, and hence arises the need to continuously evaluate your life insurance needs, especially for periods of 10 years more.
A term life policy is generally paid over a long period of 10-30 years. Policyholders pay a fixed rate for term life insurance over this span of time .As the rate of inflation is commonly in the range of about seven to nine percent annually, the value of the rupee decrease by this percentage each year. Hence, one is not able to acquire the same amount of coverage benefit as in previous year; the premium you pay per month for life insurance today will in rupee terms be the same, but will have lesser value 10 year from now due to inflation.
An increasing term insurance policy may provide the flexibility to increase the sum assured by five to 10 percent each year to reflect the rate of inflation .Thus it will hedge against the rising cost of living with the option of increasing the sum assured. Such policy insures adequate financial protection at an affordable cost. Most companies provides the enhanced insurance with appropriate rider option at a nominal extra cost, AS well rewards for healthy lifestyle habits like non –smoking etc. If you are concerned about rising inflation and are buying a policy relatively young in a life, for example just after having a child, this may be suitable option for you .However, it’s worth nothing that the cost of insurance premium is also likely to rise to reflect the increase sum assured .So, you will need to be certain that you would be able to afford the increased premiums.
While many people fear inflation wreaking havoc on the financial markets and causing a decline in the economy in general ,many overlook how inflation affect insurance .As inflation cause a loss of the Rupp’s buying power ,It is also reduce the value of an insurance policy. Of course , certain type of insurance coverage are more seriously affected then other .Health coverage and auto insurance premiums change yearly, and hence ,are less affected .Insurance policy held for many year before use are those inflation has the most significant effect on .While life insurance that inflation often affects ,As a consumer is likely to pay premiums for decades without using the insurance .By understanding how inflation often effects ,as a consumer is likely a premiums for decades without using the insurance policies ,policyholders can take considered step to ensure that the sum assured remains adequate at the time when it’s required .
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