When you purchase life insurance, it is relatively simple to work out the amount of cover you require based on your current family needs. Still, your policy could be active for 20, 30 or even more years. During this period, inflation can result in living costs increasing significantly. This could mean a term insurance policy deemed adequate today may prove insufficient in future. So, does that mean inflation affects the term insurance amount you receive?

Yes. Just like income, liabilities, financial goals, family expenses and portfolio of assets, inflation should also be an important factor to determine the sum assured.

Inflation is a fall in the value of money; it means that over time, you get less and less for your money. This can be summarised as Rs 1 crore for everyday expenses might seem like a large safety amount today, but by the time 20 years have passed and your family receives the same amount, the actual purchasing power of that amount will likely be far less, owing to an increase in costs of housing, education, healthcare and daily living.

This becomes more relevant in long-duration term insurance plans. The death benefit is normally a fixed sum assured amount. If the policy has a sum assured of Rs 1 crore, then the sum assured would be paid to the family irrespective of whether the policy owner may have died after 4 or 5 years. So, the cover should provide for future needs of the family and not current expenses alone.

Let's take this as an example where inflation averages 6% per annum.

If today your family needs Rs 1 crore to sustain a certain standard of living, that sum might not have the same purchasing power in ten years. In a 6 % inflationary environment, prices can double in just over 10 years.

So, for instance, someone who purchased a term insurance plan at age 30 on a 30-year policy term should not assume that the financial value of the cover will remain unchanged throughout the policy. This doesn't imply that you should necessarily increase your term insurance cover to twice or thrice. But inflation is definitely one of the parameters that you should be considering while planning your family's future financial needs.

 

There is no single coverage amount that works for everyone. A practical approach is to consider your family's potential future financial requirements.

Calculate your current income and those your family is relying on, such as, for example housing, education, healthcare, and daily expenses. You should also include other things that you have never mentioned before such as the possible change in your expenses over time, which is the reason it is never recommended to make your life insurance coverage the same as your current spending.

Prioritise those future needs such as your children's education expenditure, spouse's financial support, and other long-term goals. Your coverage should consider these costs rising over time also.

Don't forget to cover major liabilities such as your home loan, personal loans, and other debts. Your insurance coverage should not only pay off these liabilities, but also provide you with the means to support your family's expenses throughout your life.

Consider how future expenses could be increased due to inflation. For example, if at present, your child's education costs 20 lakh, perhaps a very few years from now your expenses may be way too high for you to handle. By taking into account inflation, you will arrive at a more realistic and accurate estimate of your insurance coverage.

While calculating the additional coverage needed, you must consider your savings, investments, property and existing life insurance policies.Click Here To Follow Our WhatsApp Channel

Term insurance cover = Future financial needs and liabilities + Family expenses existing assets and insurance

Inflation is just one of the reasons why people might decide to have a higher than normal term insurance cover. Purchasing such a high cover as an inflation protection would increase the premium amount that you will have to pay today. A better way out is to take into account one's income, current and future commitments and liabilities, objectives, assets and the duration of the policy and choose an increasing cover option in the existing term insurance plan.

Some term policies have provisions that can increase the life cover (in line with policy rules). But a rise in cover should not be taken (by itself) as a general solution for inflation. Take consultation and know how long and when the cover increases, whether there is an upper limit and what the premium impact would be. Another solution might be to begin with an appropriate level of cover for your future needs, generally advised to be 20 times your current annual income. This will reduce the risk of being under-insured as your family's expenses continue to grow.

Your insurance needs may need to be reviewed as your circumstances change or you enter a new stage in your life such as:

?      Marriage

?      Birth of a child

?      Buying a house or taking a home loan

?      A significant increase in income

?      Taking on a major new liability

?      Starting a business

?      Changes in your family's financial responsibilities

Regularly reviewing your financial needs can help you determine whether your existing term insurance cover remains adequate.

Inflation may actually decrease the buying power of the sum you get from your term insurance in the future. A sum assured that seems adequate now could prove inadequate a few years down the line. So, when you decide on how much coverage you need, do not just consider your current needs. Think through the future living expenses, financial objectives, liabilities, current assets and periods your policy will be active. Factoring in inflation while calculating these needs would lead you to select a term insurance cover more suited to your family's financial needs.