As the next generation of entrepreneurs, engineers and other professionals take
over the mantle of India's economic growth, it is time to assess how anchored they
are in protecting themselves from future financial risk. In particular, how well
integrated is the factor of inflation in their insurance calculations.
Very often, insurance covers and inflation planning are seen as two exclusive and
separate goals, and current insurance education does not connect the two. Conventional
wisdom tells us that you should have insured a sum of about 12 times your annual
income, after subtracting assets and adding liabilities. But all these computations
can be put off balance by rising prices and its impact on your standard of living
and consumption pattern.
How does Inflation Affect Term Insurance Policies?
Inflation refers to a general rise in prices compared with that of the same basket
of goods in a suitable base year. Commonly measured through indices such as the
CPI for consumer goods or the GDP Deflator for the country's economy as a whole,
inflation rates determine the future value of money.
For instance, in September 2011, the inflation rate was reported to be 6.1%, while
between 1969 and 2010, India's average inflation rate was found to be 7.99%.
Healthcare and education, two major heads of future consumption for young families,
have witnessed higher inflation rates than other consumable items. Hence, investing
to meet these costs in the future requires you to choose a plan that beats these
rates. It may also require you to save a little more now by investing in term insurance
policies and even alter your lifestyle to more sustainable patterns
Time Factor of Inflation on Life Insurance Policies
Consider a term plan that you pay a fixed rate for annually. Now, if inflation rates
stay averaged at between 7% and 9%, then the value of your accumulated money decreases
by this percentage each year. In other words, you are actually paying less and less
each year for your fixed interest term insurance. For example, an item worth Rs
10 lakh in 2011 would be worth about Rs 45 lakh in 2031.
Increasing Policies Offer a Solution
You can increase the sum assured by your term plan by investing in Increasing Term
Insurance policies. Such a plan hedges your funds by increasing premiums at the
rate of 5%-10% per year. Insurance firms may sweeten the deal by allowing attractive
riders, healthy lifestyle rewards and special discounts for women.
Who is This Plan meant for?
This is very suitable for those just starting a family, even though premium payments
may also rise. Professional advice tailored to suit your needs is recommended before
choosing this option.
A claim processing by the firm is another very important parameter you can use to
measure your insurer's performance. There are enough regulatory provisions to ensure
smoothness in work flow here and allow you to make an informed choice.