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Inflation and Life Insurance: The Impacts

Although it’s a new year, the cost of living continues to rise. Inflation impacts our groceries, housing, and yes–even our insurance. You might be wondering how exactly inflation impacts insurance, especially life insurance. Well, as the purchasing power of money continues to go down, insurance premiums may rise.

Life insurance is normally chosen based on how much financial protection you believe your family will need upon passing, and as your dollar begins to lose value, your beneficiaries may not have as much coverage in the end. Inflation and insurance can be complex topics, so let’s discuss some of the basics on how inflation affects life insurance!

inflation and life insurance

Inflation Drivers

There are many different drivers behind inflation, but we’re going to look at the two main factors today: demand-pull and cost push

Demand-pull begins happening where there is too much currency in circulation for the goods available. Essentially, this means the demand is higher than the supply. A lot of this occurred after the Covid-19 pandemic. People were not able to spend money normally during lockdowns, leading to a shortage of parts and supply issues due to factory shutdowns. 

Cost-push inflation occurs when there is a decline in the supply of goods and services and demand either increases or remains unchanged. This disruption in the supply of goods and services means that prices are pushed higher by inflation.

Traditionally, the inflation rate of the United States has been around 3% each year. In 2011, the annual inflation rate rose to 3.2%, then 4.7% in 2021, and 7.5% in January of 2022 with the country still feeling the weight of the pandemic. Currently our inflation rate is 3.35%. Luckily, the Federal Reserve Bank of St. Louis. Goldman Sachs projects core personal core expenditure (PCE) inflation will fall to about 2.4% in December of 2024–with auto, labor and housing rental markets spearheading the disinflation (Forbes). However, this is almost 10 months down the line and could change with any major economic downturn.

inflation and life insurance

So How Does Inflation Affect Life Insurance?

  1. New Policy Premiums May Increase. Inflation makes everything cost more, and life insurance companies are no exception. There may be an increase in rates, but the industry is competitive. Companies may do what they can to prevent rate increases to prevent customers from switching to a competitor. A good thing to remember is that once your policy is approved, your life insurance premiums will remain the same. Existing policy holders don’t have to worry about inflation causing changes to their monthly charges. Just another reason to go ahead and lock in your insurance rates sooner than later! Plus, you can always count on the staff at Arlington Greene Agency to help.
  2. Cash Value Goes Up. Whole life insurance and universal life policies often pay fluctuating death benefits. Insurers take premium payments and invest it, keeping track of the performance of these investments to decide your death benefit. Inflation generally leads to higher interest rates, resulting in higher returns on your life insurance investments and greater cash value.
  3. Death Benefit Will Have Less Buying Power. As we’ve talked about, inflation reduces the power of your dollar. Usually, term life insurance policies provide a preset payout in the event of someone’s death. Although this amount doesn’t change when the person passes because of the nature of the policy, that amount might not have the same buying power in the future due to inflation. For example 100,000 might not have the same buying power if your beneficiary receives it in a more inflated future. You should revisit your policy regularly in order to ensure your coverage amount is enough to sustain your beneficiary (PolicyAdvisor). Don’t let inflation erode your death benefit! As always we recommend using a professional whenever revisiting a policy. Contact our trained Arlington Greene Agents here.
inflation and life insurance

Inflation and Life Insurance Strategies

Finding the right policy is important, but there are also a few strategies to help limit its effect on your policy. Here are some terms to familiarize yourself with before considering a policy during high inflation times.

  • Indexation–means that your policy will adjust as inflation naturally occurs. It cannot be adding to an existing policy, so you might need to decide on this in advance.
  • Policy Riders–a clause built into your policy that provides extra protection against things like inflation. This can come at an additional fee and may be only offered by some insurance companies.
  • Periodic Coverage Boots–allow you to factor the inflation rate into your coverage based on specific needs. Plus, you can course-correct if need be! Sometimes adding additional coverage is the easiest way to stay ahead of inflation (UnitedBenefits).
inflation and life insurance

The Best Life Insurance Policy for Inflation

Before you can determine the right policy for you during times of high-inflation, you must consider your overall financial status and remember to be flexible. Providers may have to cut back on the range of products they offer due to the rising property claim costs and operating costs. All of this combined can lead to higher premiums. Check all the details of the insurance policies you are considering, and always talk to an agency like Arlington Greene if you need more insights. Agencies often have their eyes on the market more and can give you up to date information on the best companies or policies for you. 

Whole Life Insurance can be a great way to secure lifetime protection with premiums that are guaranteed never to increase as long as they are paid. The death benefit provides cash to your beneficiaries once you pass away, plus you get possible tax-free access to your cash value when you’re alive. This gives you security during times of financial uncertainty and the advantage to budget accurately.

Your cash value typically earns dividends or a fixed interest rate yearly. So, as you make premium payments, a portion of the premium is allocated towards the cash value. This value can be accessed through policy loans or withdrawals. It provides a valuable source of liquidity for various financial needs, like retirement income or covering unforeseen expenses.

If you’re looking for a policy that is a bit more flexible, Term Life Insurance is a great way to get temporary coverage with abilities to convert to long-term coverage later in life. You can choose exactly how long you want coverage. This lets you match your coverage length with goals or milestones such as paying off your mortgage by a certain date. Premiums can also be locked in at a particular rate for an allotted amount of time. Term life provides a short term death benefit so your beneficiaries will receive a sum if you pass away during this time. Cash value doesn’t accumulate, but some policies may come with flexible features that allow you to use your benefits early in the event of an unexpected circumstance.

Making sound financial choices in turbulent times means balancing needs and costs and deciding what works for you based on your circumstances. It can be tempting to cut back, but just remember life insurance brings security to not only yourself, but your family when unexpected circumstances arise!

Need Help Navigating High Inflation? Call Us Today!

Coming to a decision about life insurance can be so much to consider. With so many different policies, it can be hard to determine what you need all on your own. At Arlington Greene Agency, we have experts in the life insurance field who are ready to help. Arlington Greene Agency offers all the same policies that you would find going directly through a specific insurance company. We can also help you find the right coverage at the best rates by comparing all side-by-side. Our team can help you decide on whatever plan is best for your situation. We can curate a plan just for you—guiding your family into securing your financial future!

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