Markets
BSE See NSE See 39,601.63
488.89 (1.25%)
collapse Related Readings collapse

Adding Up: How Inflation Affects Your Insurance Policy

| 1/25/2012 8:28 PM Wednesday

Inflation is at an all-time high these days. As a result, the cost of living has soared and the prices of essential commodities too have peaked. One element that few people tend to think about while considering inflation is the impact rising inflation has on one’s insurance needs. While the rule of thumb states that you should look at a life cover of around 10 times your annual income (after deducting your investment assets plus any liabilities), it is also important to consider the impact of increasing inflation on your insurance portfolio.

Inflation refers to the general rise in prices measured against a standard level of purchasing power. The most well-known measures of inflation are the Consumer Price Index (CPI), which measures consumer prices, and the GDP deflator, which measures inflation in the domestic economy. From 1969 to 2010, the average inflation rate in India was 7.99%. So, for instance, anything that could be purchased for Rs 10 lakh in 2011 would cost approximately Rs 45 lakh in 2031 at 8% inflation rate.

With respect to insurance, though inflation also causes premium rates to rise, the most significant factor for consumers is the reduction in value of the benefit amount. For example, a person who buys a life insurance policy of Rs 10 lakh may find that this coverage does not serve the purpose when s/he needs it. Though Rs 10 lakh may have been a sufficient amount at the time of purchase, s/he may not use the coverage for 20 years. Finally, when the insurance sum is claimed, the Rs 10 lakh insurance benefit may not be enough.

With the passage of time, your family’s needs are bound to increase. Unforeseen events do occur, and all individuals wish that their family can sustain the same lifestyle even when they are not around to provide for them. Unless you are purchasing a term life insurance policy for a 3-5 year period, inflation is sure to catch up. It is for this reason that the future value of money should figure in your calculations, and hence arises the need to continuously evaluate your life insurance needs, especially for periods of 10 years or more.

A term life policy is generally paid over a long period of 10-30 years. Policyholders pay a fixed rate for term life insurance over this span of time. As the rate of inflation is commonly in the range of about 7%-9% annually, the value of the rupee decreases by this percentage each year. Hence, one is not able to acquire the same amount of coverage benefit as in the previous year; the premium you pay per month for life insurance today will in rupee terms be the same, but will have lesser value 10 years from now due to inflation.

An increasing term insurance policy may provide the flexibility to increase the sum assured by 5%-10% each year to reflect the rate of inflation. Thus, it will hedge against the rising cost of living with the option of increasing the sum assured. Such policies ensure adequate financial protection at an affordable cost. Most companies provide this enhanced insurance with appropriate rider options at a nominal extra cost, as well as rewards for healthy lifestyle habits like non-smoking etc. If you are concerned about rising inflation and are buying a policy relatively young in life, for example just after having a child, this may be a suitable option for you. However, it is worth noting that the cost of your insurance premium is also likely to rise to reflect the increased sum assured. So, you will need to be certain that you would be able to afford the increased premiums.

While many people fear inflation wreaking havoc on the financial markets and causing a decline in the economy in general, many overlook how inflation affects insurance. As inflation causes a loss of the rupee’s buying power, it also reduces the value of an insurance policy. Of course, certain types of insurance coverage are more seriously affected than others. Health coverage and auto insurance premiums change yearly, and hence, are less affected. Insurance policies held for many years before use are those that inflation has the most significant effect on. Whole life insurance is a form of insurance that inflation often affects, as a consumer is likely to pay premiums for decades without using the insurance. By understanding how inflation impacts insurance policies, policyholders can take considered steps to ensure that the sum assured remains adequate at the time when it is required.

 

Find More Articles on: DSIJ Magazine, Insurance, Personal Finance, Insurance, Life Insurance

news letter

More for the early bird.

Get the post-market reports and breakfast news right in your inbox. See latest »

DSIJ Mindshare

Sensex soars by 489 points

Dnyanada Kulkarni / Article rating: 4.5

The markets closed at higher levels at the culmination of Thursday’s trading session with the Sensex rising by 1.25 per cent and Nifty50 up by 1.2 per cent. The stock that showcased dramatic gains was Jet Airways as it gained nearly 121.97 per cent!

12345678910Last

Tiger Logistics topline to grow by 10%--buoyant over infra sector status to logistics sector

Tiger Logistics topline to grow by 10%--buoyant over infra sector status to logistics sector

Logistics sector will play a vital role in making the concept of ‘Make in India’ a success. This will be further aided by some of the recent steps taken by Government of India such as granting of infra sector status to logistics sector.

Best and worst Performing Sector Funds of Year 2017

Best and worst Performing Sector Funds of Year 2017

As the year-end has approached most of you are eager to know the mutual fund movers and shakers of the year 2017. Read on to find the performance of various sector dedicated funds.

Markets may start positive, but volatility likely due to F&O expiry

Markets may start positive, but volatility likely due to F&O expiry

The start of the F&O expiry day is likely to be in the green, but volatility may creep in with the progress of the session. The SGX Nifty suggests that the Nifty could open at 10,525 with gains of 32 points at the opening bell. 

Pidilite announces buyback of Rs 500 crore

Pidilite announces buyback of Rs 500 crore

The buyback offer comprises purchase of up to 50,00,000 equity shares. The buyback offer size comprises 0.975 per cent of the total paid-up equity capital of the company.

Bank Nifty drags markets to close in the red

Bank Nifty drags markets to close in the red

The late session fall in Bank Nifty changed the direction of the market, leading to a marginal fall in the benchmark indices. Bank Nifty yet again resisted at its multiple point downward sloping trendline level at 25733.

Six major underperforming MF schemes having higher expense ratios

Six major underperforming MF schemes having higher expense ratios

Mutual funds with a large size of assets under management (AUMs) are supposed to have lower expense ratios. However, there are schemes with large AUMs but having higher expense ratios and generating lower returns. 

Nifty Pharma supports market; Sun Pharma at bullish reversal

Nifty Pharma supports market; Sun Pharma at bullish reversal

Nifty Pharma index has come in as the healer in an otherwise sluggish market. Index has given a consolidation breakout at the 9420 level today and if the it sustains 9420, followed by 9628 on the upside, it has a long way to go.

Ten stocks close to their 52-week low

Ten stocks close to their 52-week low

Following stocks are close to their 52-week low as at 12.35 p.m. on December 27.

Ten stocks close to their 52-week high

Ten stocks close to their 52-week high

The markets on December 27 opened gap down. BSE Sensex is trading at 34,068.15, up by 57.54 points and the Nifty is trading at 10,539.45, up by 7.95 points.

Five stocks with selling interest

Five stocks with selling interest

Overall volumes in futures & options currently stand at 62.75 lakh contracts with a turnover of Rs. 5,19,204.72 crore.