Why should you consider inflation when buying a term plan?

India’s retail inflation increased to 5.69% in December 2023^³. Right from your basic needs like groceries to gold, inflation affects all goods, commodities, and services. That means you need to spend more money to avail the services, goods, and commodities that you used to buy for less some time ago. The inflation rate for services like education and healthcare is rising at a rapid speed. As inflation has a direct impact on your purchasing power, it can directly impact your lifestyle too! That means your cost of living ten years later would be much higher than today, and there would also be a slight change in your lifestyle, impacting your financial needs, saving habits, etc.

If you have to maintain a steady lifestyle, it is important to plan your finances wisely and efficiently by factoring in inflation. When it comes to buying life insurance coverage, many people overlook the impact of inflation on their term insurance coverage needs.

Term insurance plans are the best way to secure your family’s financial future against the uncertainties of life. Though you plan for every goal, it is also important to plan in advance for unforeseen situations in life that could impact your family or loved ones financially. Having an adequate amount covered ensures your family’s financial stability even when you are not around in this world. When you buy term insurance coverage, deciding the coverage amount is paramount. While you are assessing your insurance needs, you need to factor in inflation to ensure adequate coverage. Let’s understand how term insurance relates to inflation, by looking at pertinent questions like “do term life insurance rates go up?” and “can we increase term insurance cover?” and “why do we need term life insurance inflation protection?”.

Let’s take a look at a few of the crucial reasons to factor in inflation while deciding your term insurance coverage:

• Expenses grow as you age:
  As you grow old, your responsibilities increase, and with the responsibilities come the expenses. It is not just the cost of goods and services; your own expenses have grown over the years. As your parents get older, their medical expenses go up. Similarly, your and your spouse’s medical expenses would increase with age. As your child grows, education expenses increase. It is not just about the day-to-day expenses; your liabilities also need to be considered. With the increasing age, your liabilities would increase for buying the vehicle, home and for, education, etc. Considering these growing expenses over the years, it is important for you to have an adequate amount of COVER to financially safeguard your family to ensure financial stability for them even when you are not around. Hence, it is crucial to consider the future expenses and the impact of inflation on such expenses to arrive at an adequate amount of coverage to COVER the inflation.


• Inflation reduces your purchasing power:
  Inflation reduces your purchasing capacity. That means you would be able to purchase less for the same amount of money that you could 20 years back. The term insurance coverage that you avail of INR 1 Cr keeping in mind your financial needs without factoring in inflation today, would not be enough to meet your family’s future financial needs. With the rising inflation, there would be a yearly decrease in the value of your money correspondingly. Hence, you need to accordingly enhance the term insurance coverage and benefits. You can use a term insurance calculator that factors in inflation to calculate your term insurance coverage.


• The rate of inflation varies as per your goal and family dynamics:
  The main purpose of buying term insurance coverage is to protect your family during unforeseen incidents and help them achieve all their goals, even in your absence. You would always want your children to have the best education, a good retirement life for your spouse, and good health coverage even if you are not around in this world. Financial planning is also done to achieve these long-term goals. However, considering the uncertainties of life, you secure their future dreams with life cover. The inflation rate applicable for each of your goals would vary. For example, the inflation rate applicable to education is almost double that of household inflation applicable to your retirement goals⁴. Medical inflation is also higher than that normal inflation. Hence, it is important to take into consideration of inflation for each of your goals to ensure you avail the right amount of COVER.

Growing term life policy or the increasing sum assured term insurance can be of great help as it comes with many advantages. Let’s take a look at the benefits of increasing sum-assured term insurance (or term insurance with increasing cover) to understand its importance:

• Gives you a cost advantage
  One of the major advantages of opting for growing COVER is the cost savings whenever you need higher coverage in the later age of your life. As your premium remains the same, you get the cost advantage. If you have to buy additional coverage with a COVER insurance plan, it would cost you COVER later in your life as your age increases. Increments at each stage of your life in the growing term insurance would give you needed protection at an affordable premium.


• Helps you COVER inflation
  As your age increases, the cost of goods and services or inflation does keep increasing. Your expenses and liabilities would go up at each stage of your life. With the increase in the rate of inflation for various expenses and needs, having an increased sum assured term life insurance helps you effectively COVER the rising inflation. If you need financial stability for your loved ones and peace of mind for you, it is important to opt for an increasing cover term plan.


• Aligns in line with important life events
  Each life event adds to your financial responsibilities which has an impact on your human life value. Some of the important events and changes in family dynamics are marriage, childbirth, purchasing a dream home, etc. Your life insurance needs keep changing at each important stage of your life. Let’s say you were just married when you purchased term insurance coverage. Now, you have two children! This change in family dynamics would call for higher life insurance coverage. Having an increasing sum assured term plan is one best way to COVER the changing needs.

Inflation is an important factor to consider when buying a term insurance policy. The value of money decreases over time due to inflation, which means the sum assured that seems substantial today may not have the same purchasing power in the future. Here's how you can tackle rising inflation when buying a term insurance policy:

• Opt for an Increasing Sum Assured:
  Some insurers offer term insurance plans where the sum assured increases annually by a certain percentage to help offset the impact of inflation. This type of plan can help ensure that the life cover stays relevant in terms of real value even as years go by.


• Buy a Higher Sum Assured:
  You can choose to buy a higher sum assured initially to account for the expected rise in living costs due to inflation. Although this would mean higher premium payments, it could offer better financial protection in the long run.


• Periodically Review and Update Your Coverage:
  Your insurance needs may change over time due to changes in income, family size, lifestyle, and inflation. Regularly reviewing and updating your coverage can help ensure it remains adequate.


• Factor in Inflation While Calculating Future Expenses:
  When calculating the sum assured based on your family's future financial needs, be sure to factor in the impact of inflation. For example, if you're planning for your child's education or marriage, remember that these costs are likely to increase over time due to inflation.


• Invest in Other Inflation-Proof Financial Products:
  While term insurance provides financial protection in the event of your death, it's also important to have investments that can potentially beat inflation over the long term, such as equities or mutual funds. Diversifying your financial portfolio can help safeguard against inflation.


• Consider the Payout Option:
  Some term plans offer the option of monthly payouts for the sum assured instead of a lump sum. This can act as income replacement and may be more beneficial in tackling inflation as your dependents receive the payout over a period of time.

Tackling inflation is a crucial aspect of financial planning. In the context of term insurance, it's about ensuring that the coverage you opt for today will be sufficient to meet your family's financial needs in the future. As always, consider seeking advice from a financial advisor to better understand and plan for the impact of inflation on your term insurance policy.

Now, we know inflation can have a major impact on your term insurance coverage. If your term insurance coverage has to COVER inflation, here are a few ways to do so:

• Buy a Growing Term Cover Insurance:
  One of the best ways to COVER inflation is to buy a growing term cover at an early age. This insurance increases the sum assured automatically at specified intervals or as and when you cross a milestone in your life for the same amount of premium. This ensures you are in line with the rising inflation.


• Buy COVER Insurance Plan:
  Rising inflation definitely calls for increased life cover. If you have not purchased a growing term cover, you would need to shell out COVER to enhance your life cover by buying a COVER insurance plan.


• Buy a Term Insurance Plan with the option of Life Stage Increment:
  You can also purchase a term plan with a life stage increment option that ensures the increment in sum assured based on your life stage. This helps you keep up the life cover with inflation.

Factoring in inflation is extremely crucial while deciding the term insurance coverage to ensure future financial stability for your loved ones.

In conclusion, understanding the relationship between term insurance and inflation is a critical component of robust financial planning. Given the nature of inflation to erode the purchasing power of money over time, the sum assured that seems adequate today might fall short of your family's financial needs in the future.

Addressing this requires strategic planning while purchasing a term insurance policy. Options such as opting for an increasing sum assured, buying a higher sum assured initially, and periodically reviewing your coverage can help maintain the real value of your sum assured. Factoring in the impact of inflation while calculating future expenses can provide a more accurate estimate of your family's future financial needs.

Furthermore, diversification of your financial portfolio with inflation-proof investments, along with careful consideration of the payout option in your term plan, can provide an additional layer of financial security.

Finally, it's crucial to remember that term insurance is about protecting your loved ones from financial uncertainty in your absence. Therefore, planning for inflation is essentially about ensuring that your family has the necessary financial resources to maintain their standard of living, no matter what the future brings. For an accurate and personalized assessment of your term insurance needs in light of inflation, consider seeking the advice of a financial advisor.