It’s tough to deny the impact that inflation has had on everyone in the last year. Everything from petrol to food has become more expensive, and many people are still figuring out how to deal with it.
While paying bills is naturally the primary priority, consumers with life insurance must consider the impact of inflation on their coverage. Here are two things policyholders may do to guarantee their family members are always adequately protected.
1. Choose a policy with an inflation rider
Inflation riders are optional endorsements that policyholders can add if they want to ensure that their death benefit’s purchasing value remains steady over time. It may increase the cost of a life insurance policy, but it will also ensure that beneficiaries are well provided for, whether the insured dies now or many years later.
Life insurers frequently provide policyholders the option of choosing between a simple inflation rider and a compound inflation rider. Simple inflation riders raise the death benefit of the policy by a specified amount each year. If a policy has a $100,000 death benefit and a 3% simple inflation rider, for example, its value would increase by 3% of the policy’s initial value, or around $3,000 every year. Therefore the death benefit after one year would be $103,000, $106,000 after two years, and so on.
A compound inflation rider calculates the death benefit increase using compound interest. Returning to our $100,000 death benefit example, if the policy had a 3% compound inflation rider, its value after the first year would be $103,000, the same as with the simple inflation rider. However, the death benefit would increase by 3% of its current value, or $103,000, in the second year, to $106,090. And this disparity will only grow over time.
Compound inflation insurance is normally more expensive than simple inflation insurance, but it may perform a better job of preserving the death benefit in line with escalating costs. If a life insurance company offers both alternatives, it doesn’t harm to price them both out to see what the difference is.
2. Review the policy’s limits annually
Individuals who do not have an inflation rider on their policy should nevertheless examine it on a regular basis to ensure it meets their needs. If they believe their initial death benefit will be insufficient, they may consider getting additional coverage.
It’s important to note that life insurance normally becomes more expensive as people age, particularly for those who establish bad habits like smoking or have major health problems. This may make it impossible for some people to obtain additional coverage, even if they desire it. But, not everyone will notice a significant hike in their premiums.
Remember that inflation isn’t the only factor that can affect the desired death benefit. The addition of a new family member or the departure of a kid may influence how much coverage the policyholder believes they require. Consider all of these factors when selecting how much life insurance to get.