Ensure Life Insurance Keeps up with Inflation

Inflation is real and keeps rising all the time. Inflation affects the economies of the world, it affects businesses and all sectors of industry. Insurance is not immune to inflation. As a matter of fact, one’s insurance cover is affected by insurance and steps need to be taken to ensure that one’s life insurance keeps up with inflation, in order to get real value from it when the time of making a claim comes. With inflation ever rising, it is expedient to make sure that one’s insurance cover, be it life insurance cover or term life insurance cover, is also kept at par with inflation rates.

Most life insurance policies come with a built-in mechanism to combat inflation from reducing the value of the life insurance policy in the long run. Such policy premiums increase on a yearly basis to match the rate of inflation increase. Inflation increases every year and such premiums also go up by a certain percentage to keep up with the inflation rates. By so doing, insurance companies ensure that your insurance claim is not eaten away in value by inflation, but cocooned. When this happens, the amount to be claimed is the equivalent at the time of claim with one’s cover, taking into consideration the inflation over the years. The insured person therefore can opt for this built-in mechanism of increasing premiums in order to maintain the value of the cover over a period of time.

An example

A good example would be when one takes out life insurance cover of one million rand. If interest increases by about 6% per year, this would mean that in about ten years, the value of one million rand life insurance cover will be about one million and six hundred rand in total. The insured’s premiums will then be increased to cater for this yearly increase in inflation in order to give the insured the value of his or her life cover at the time of making the claim. If on the other hand, the premiums remain unchanged and the insured opts for the same premiums over ten years, then the actual value of one million will be about four hundred rand, which is way less than a million.

Guard against being under-insured

Inflation is one of the factors that can lead to being under-insured. The good news is that inflation can be prevented from affecting your claim and the value of your life insurance cover. Insurers determine by how much they will increase your premiums per year to match inflation increases. Although this increase may not be a welcome change to your budget and monthly expenditure, it is usually a small amount added to your premiums, which amount goes a long way when it comes to your life insurance claim when the time comes. It makes all the difference. One can index-link his or her policy to make sure that the amount is brought up to keep up with inflation for the duration or term of the policy.

Making the wise choice

Most insurance companies ask their clients whether they would opt for an increase in their yearly premiums to cater for the increase in inflation. The wise choice is to opt for this mechanism as it protects your life cover claim and brings it up to the actual value of your initial cover. Inflation has been known to eat away at most things; you can make your life insurance exempt from the effect of inflation.