Imagine you've secured life insurance, a safety net for your loved ones in case of your passing. But what if, over time, that safety net becomes less secure? Inflation, the silent thief, can erode the value of your life insurance payout. In India, where long-term life insurance policies are common, this is a crucial factor to consider.
What is Inflation?
Imagine you bought a litre of milk for Rs 49.18 in 2021. Today, that same litre might cost Rs 58. This rise in prices over time is what we call inflation. It happens with almost everything we buy, from groceries to gas.
Inflation can erode the real value of assets, including life insurance coverage.
How can Inflation affect your Insurance Policy?
It's crucial to consider the long-term financial impact of inflation when evaluating your life insurance needs. Neglecting inflation can result in your loved ones receiving a payout that falls short of meeting their future financial requirements and goals. Here's how inflation can affect your life insurance:
When you buy a life insurance policy, you agree on a sum assured - a fixed amount that your insurer will pay out upon your death or at the end of the policy term. This sum may seem sufficient now, but with inflation, the buying power of this sum decreases over time. This means your beneficiaries might get less financial support than you planned when you bought the policy.
To illustrate, suppose you purchase a life insurance policy today, and the agreed payout (also known as the sum assured) is INR 10 lakhs. This amount might seem adequate today to cover your family's needs such as daily living expenses, education costs, and any outstanding loans or debts.
Now, let's fast forward 20 years into the future. The cost of everything - food, rent, education, healthcare - has gone up due to inflation. What cost INR 100 today might cost INR 200 or even more in 20 years. However, the payout from your insurance policy is still the same INR 10 lakhs that you agreed upon 20 years ago. But due to inflation, the purchasing power of that INR 10 lakhs has diminished. This means it will buy less in the future than it does today.
So, even though your family will receive the same INR 10 lakhs, it will not stretch as far as it would have 20 years ago.
Then, how can you steer clear of this inflation hurdle?
1. Plan for inflation: When deciding on the sum assured, factor in the average long-term inflation rate (around 4-6% in India). This will ensure that the payout remains significant, even years from now.
2. Choose policies with increasing cover: Some life insurance policies offer an annual increase in the sum assured by a fixed percentage. This increase can help counter the effect of inflation, making sure your coverage remains adequate over time.
3. Regularly review your policy: Your financial situation and inflation rates can change over time. It's important to regularly review and, if necessary, increase the sum assured to ensure it aligns with the current situation.
Life insurance is a vital part of financial planning, but it's important to remember the impact of inflation when choosing your coverage. By planning for inflation, opting for policies with increasing cover, and keeping an eye on your policy, you can ensure that your life insurance policy remains robust and provides the support your loved ones need.
Keep in mind that inflation plays a crucial role when acquiring insurance policies. It's essential to factor this in when purchasing various financial instruments such as child insurance plans, annuities, ULIPs, and others, to safeguard your family's financial future.