Here’s Why You Should Consider Inflation When Buying a Term Insurance Policy

When speaking of inflation, the first thing that comes to our mind is the increasing prices of vegetables, fuel, real estate, and gold. While inflation impacts the value of our investments and financial planning, most of us conveniently neglect inflation when investing in different instruments for our financial goals and buying a term life insurance policy. However, ignoring inflation when investing for your goals and buying a term insurance policy can compromise the financial security and comfort of your loved ones.

Here's why you should consider inflation when buying a term insurance plan:

1. The purchasing power will be decreased with the rising inflation:

With the rising inflation, your purchasing power decreases. You might remember one of your uncles or aunties bragging about how they made a smart decision and bought a plot years back that is worth a crore now. Well, that's nothing but real estate inflation. The same is the thing with the insurance benefit that your insurance policy will pay in the future. A life insurance policy bought 10-15 years back might not be adequate to cover your family's needs today.

Likewise, while you may feel that the 'X' amount is adequate in the current scenario and buy a term plan that offers 'X' sum assured, it might not be sufficient to meet your family's requirements 20 years down the line as the purchasing power of the 'X' amount keeps decreasing over the years. The purchasing power decreases annually by a similar percentage to the yearly inflation. So, if the rate of inflation is 7%, you are required to increase your sum assured by 7% every year.

2. The inflation rate differs for each financial goal:

The primary objective of purchasing term life insurance is to provide your family with financial security so that they can continue living the same lifestyle and do not have to compromise on their life goals in your absence. These goals typically include children's higher education, spouse's retirement, children's wedding, etc.

However, the rate of inflation for each of these goals may differ from one another. For instance, the annual inflation rate for higher education can range between 10% to 20%, whereas the annual inflation rate when planning for retirement can be considered as 8%. Hence, it is important to consider the different inflation rates and make sure you buy a term insurance policy that takes care of the impact of inflation and provides adequate coverage in times of need.

3. You are likely to outgrow your existing assets:

With the passage of time, our needs and, subsequently, financial goals change. When you are young and unmarried, a 1BHK apartment might seem enough for you, but as the kids grow and you advance in your career, you may outgrow your existing house and feel the need to live in a bigger space in a prominent area.

While a regular term insurance policy can offer coverage that may feel more than enough right now, the value of the sum assured will come down with the inflation, and your family's needs will not be the same as now. Taking this into account, it is advisable to buy a term plan that will help your family meet their needs in the future.

4. Your expenses will increase with age:

Inflation not only pushes up the prices of goods and services but, with age, certain expenses may also increase. One such expense that can be significantly increased is the medical expenses of the family. Medical expenses will potentially increase because the medical sector has one of the highest rates of inflation. Besides, with growing age, your spouse may need frequent medical attention.

Furthermore, as you advance in your career, you may opt for several loans like a home loan to buy a house, an education loan for your child, etc., which results in increased liabilities. In case of your unfortunate demise, the creditors will have the first right to claim the outstanding loan amount. If the dues are high, it can leave no room for your family.

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How to tackle rising inflation when buying a term insurance policy?

Our financial objectives change over the years with growing age and lifestyle changes. Besides, the rate of inflation is going upward. In such a case, the sum assured that seems adequate to you at this moment might not be sufficient for your family if and when they have to make a claim. What could you do in that case? Do you have to buy a separate term plan as and when your financial objectives and lifestyle change?

An Incremental Term Insurance Policy is the answer to all these questions.

An Incremental Term Plan is a type of term plan in which the life coverage (sum assured) gets increased by a fixed amount every year. The fixed increase can be calculated by considering your future financial goals and the rate of inflation. The Incremental Term Plan can be highly beneficial to you and your family as it is an inflation-beating financial instrument that ensures your family receives adequate funds to meet their financial goals when you are no more around.

Suppose you buy an Incremental Term Plan with a sum assured of Rs 1 Cr with a fixed increment of 10% p.a. If at the end of the 10th year of the policy term, an unfortunate event occurs, your family (nominee) will receive Rs 1 Cr plus the accumulated amount of 10% every year, which will total up to Rs 2 Cr.

Similar to vanilla term plans, most Incremental Term Plans offer death benefits in a lump sum. However, some insurers advise choosing a monthly or an annual pay-out for a prespecified period that ensures your family receives regular income in your absence.

Since the Incremental Term Plan offers the huge benefit of inflation-adjusted insurance coverage, the premium of these plans is slightly higher than the basic term plans. However, the slight increase in the premium is worth it because you get the benefit from the higher life cover at an affordable premium. The premium can be the same throughout the policy period or may increase yearly, depending on the insurer and the policy you choose.

Similar to basic term plans, you can buy riders with your Incremental Term Insurance Policy by paying a slightly higher premium. It lets you customise your term plan as per your requirements. The riders provide you with comprehensive coverage towards the specific high-risk areas considering your lifestyle. Some of the popular life insurance riders are Accidental Death Benefit, Return of Premium, Waiver of Premium, Critical Illness, Accidental Disability, etc.

To conclude:

An Incremental Term Life Insurance Plan offers several benefits and ensures your family is provided with sufficient financial support when you are not around. It offers maximum coverage at an affordable premium. If you are young and know that your responsibilities will grow as you age, buying an Incremental Term Plan makes sense. It is advisable to consider the rate of inflation, your financial objectives, and your current & future financial situation when buying the Incremental Term Plan and choosing its coverage.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.