Is Your Life Insurance Policy Keeping Up With Inflation? Here’s How to Check

When you secure a life insurance policy, you’re buying financial protection for your family many years into the future. But there is a silent, persistent force that can reduce the real value of that protection over time: inflation. While the headline inflation rate in India (CPI) was relatively low at 1.54⁽¹⁾ in September 2025, inflation is cumulative. This means the ₹1 Crore Sum Assured you bought a decade ago may only have the purchasing power of ₹50 Lakh today.

The key question is: Is your life insurance policy keeping up with inflation? Understanding the relationship between life insurance and inflation is the first step toward securing your family’s future properly. This guide from ABSLI will help you audit your policy and implement effective life insurance inflation protection strategies.

The Silent Erosion: How Inflation Impacts Life Insurance Coverage

Inflation is the general increase in the prices of goods and services, which leads to a corresponding decrease in the purchasing power of money over time.⁵

Imagine you purchase a pure Term Insurance policy with a Sum Assured of ₹1 Crore today, intending for it to cover your children’s education and your spouse’s living expenses in 20 years.

• Reduced Purchasing Power: If the average inflation rate over 20 years is 6%, the ₹1 Crore death benefit may only have the real purchasing power of about ₹31 Lakh in today’s terms when your family receives it.
• Fixed Benefit Challenge: Traditional policies, where the Sum Assured is fixed for the entire policy term, are most vulnerable to this erosion. The cost of everything, from groceries to petrol, will rise while the money your family receives remains the same nominal amount.
• Impact on Financial Goals: The primary concern is that the payout will fall drastically short of your family’s future financial needs, especially for major, high-inflation goals like higher education and healthcare.

Specialized Inflation: The Hidden Costs You Must Plan For

General inflation is one thing, but specific costs like medical care and education rise much faster, creating an even greater gap in your coverage.

Certain critical costs, particularly healthcare and higher education, experience a much higher rate of specialized inflation than the general Consumer Price Index (CPI), making these financial goals harder to fund with an under-indexed life cover⁽¹⁾.

The average CPI (General) inflation for India in September 2025 was around 1.54 (provisional data) ⁽¹⁾. However, for essential services, the rate is significantly higher:

• Health Inflation: According to the National Statistics Office (NSO) data (September 2025), Health Inflation was around 4.34 (combined rural and urban)⁽¹⁾. Many industry reports suggest medical costs can rise at 10 to 15% annually.
• Education Inflation: Education Inflation was reported at 3.44 (combined rural and urban) in the same NSO release⁽¹⁾. The cost of a professional degree can double every seven to ten years.

This disparity means your family will need more money for the most vital expenses, and a fixed life insurance cover will be dramatically insufficient for these goals.

How to Check if Your Policy Provides Life Insurance Inflation Protection

To ensure your policy remains relevant, you must periodically perform a "relevance check" using an online Term Insurance Calculator and current inflation projections.

To check if your policy has adequate life insurance inflation protection, you must recalculate your required cover amount using an inflation calculator to project the future value of your family's financial needs.

1. The Real-Value Test
Take your current Sum Assured and project its future purchasing power.

Here’s a simple example:

• Current Sum Assured: ₹1 Crore
• Time Horizon: 15 years
• Assumed Average Inflation: 6%

To maintain ₹1 Crore of purchasing power in 15 years, your family would actually need a Sum Assured of approximately ₹2.40 Crores (calculated as ₹1 Crore x (1 + 0.06)^{15}). If your current cover is only ₹1 Crore, you are underinsured by ₹1.40 Crores.

2. The Needs-Based Recalculation
Instead of projecting backward, calculate the future cost of your family's key goals.

• Future Liabilities: Estimate the cost of your children’s university fees in 10-15 years, factoring in 10% education inflation.
• Income Replacement: Calculate how many years of your current income your family would need to replace (e.g., 10 to 15 years). Adjust this income by the general inflation rate.
• Debt Repayment: Ensure the cover is enough to pay off outstanding liabilities like a home loan or car loan.

If the total future requirement is higher than your current Sum Assured, you need better life insurance inflation protection.

ABSLI's Solutions: Strategies for Inflation-Proofing Your Cover

ABSLI offers specific policy features and riders that allow you to increase your life cover over time without the hassle of buying a new policy, ensuring your life insurance and inflation concerns are addressed.

1. Increasing Term Insurance Option

This is the most direct way to embed life insurance inflation protection into your policy⁽⁴⁾.

The increasing term insurance option automatically raises your Sum Assured by a fixed percentage (e.g., 5-10%) every year or at predetermined intervals, directly counteracting the erosive effects of inflation.

• Fixed Annual Increase: Your cover increases annually, usually by a simple rate, to keep pace with the rising cost of living.
• Premium Stays Low: The premium remains fixed throughout the policy tenure, making this a cost-effective strategy for increasing coverage.
• Peace of Mind: You buy a large cover initially, but the increasing feature ensures that the real value of the benefit is maintained closer to its original purchasing power.
  
  

2. Riders for Key Life Events (Life Stage Increment)

Certain ABSLI policies allow you to increase your life cover when major life events occur, such as marriage or the birth of a child.

Life Stage Increment riders offer flexibility, enabling you to boost your Sum Assured at crucial life milestones⁽³⁾, which are often the moments when your financial liabilities and the need for inflation protection spike.

3. Investment-Linked Solutions (ULIPs)

For wealth creation and capital appreciation, Unit-Linked Insurance Plans (ULIPs) offer an avenue to potentially beat inflation.

ULIPs are dual-purpose solutions where a part of your premium is invested in market-linked funds.

• Market Exposure: By investing in equity funds through ULIPs, you gain exposure to assets that historically generate returns higher than the average inflation rate.
• Fund Switching: ULIPs offer the flexibility to switch between equity and debt funds based on market cycles and your proximity to the financial goal, managing risk while chasing inflation-beating returns.

Conclusion

The impact of inflation on life insurance is often overlooked, but it is one of the greatest threats to your family’s long-term financial security. Having a fixed Sum Assured that is inadequate 15 years from now is as risky as having no cover at all. By performing a regular "real-value test" and integrating features like the Increasing Term Insurance Option or the Life Stage Increment Rider available from ABSLI, you can ensure your policy maintains its purchasing power and continues to provide the comprehensive life insurance inflation protection your loved ones deserve. Take action today to audit your cover and protect tomorrow.