Insurance and Inflation: Both a Part of Life

What does the cost of gasoline have in common with your life insurance policy? Both are subject to the effects of inflation.

Petroleum-based energy prices have been growing at a nearly 30% annual rate in 2005.¹ Today’s prices at the pump are probably the most visible reminder that inflation is almost always eroding your spending power.

You may have already adjusted the household budget to account for higher energy costs, but when was the last time you considered the effect inflation might be having on your life insurance coverage?


Deflated Spending Power

Most people buy life insurance hoping that they won’t need to use it for decades, if ever. It makes sense then to consider the long-term effect of inflation when deciding how much coverage to purchase. Although it’s been many years since U.S. consumers have experienced double-digit inflation, even single-digit inflation can take a significant toll when given enough time.

For example, imagine that in 1985 an individual examined his family’s personal financial situation and concluded that he needed $100,000 worth of life insurance to help meet his family’s financial needs if he were to die unexpectedly. And then 20 years went by.

Because inflation has averaged about 3% per year since the policy was purchased, it would take about $180,000 worth of life insurance in 2005 to equal the spending power of the $100,000 policy purchased in 1985.²

If you purchased a life insurance policy many years ago, it’s possible that your coverage would no longer provide the standard of living for your family that you originally intended. Depending on your current need for life insurance, you might purchase additional insurance coverage to help bridge the gap and make up for the effects of inflation.

By the same standard, if you are purchasing life insurance today, don’t forget to think about the potential for inflation over the next 20 years or more. It’s impossible to predict the inflation rate over time, but it could potentially rise more than it has during the past two decades. You may want to consider purchasing a larger death benefit than your family would need by today’s standards.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved.

Schedule a Regular Review

As time passes, your need for life insurance may change. That’s why it’s a good idea to review your life insurance coverage on a regular basis to ensure your policy still meets your needs. If you have new children in the family, if you recently purchased a new house, or if your estate has grown large enough to be subject to potential estate taxes, you may need to add more coverage. By contrast, if your children are grown and your mortgage is paid off, you may not need additional coverage. Purchasing the correct type of policy and the proper amount of coverage involves many factors, some more complex than others. Please call if you would like to review the role that life insurance plays in your financial situation.

1) Bureau of Labor Statistics, 2005
2) Thomson Financial, 2005. Consumer Price Index for the period 7/31/1985 to 7/31/2005.

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