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Consider Rate of Inflation when Deciding Life Insurance Cover

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Inflation is the buzzword these days. However, most people don't include inflation into the picture while reviewing or assessing their insurance needs. While the rule of thumb states, you should look at a life cover of around 12 times your annual income deducting your investment assets plus any liabilities; it is also important to consider another mix - your rising income and increasing inflation. Your rising income will have natural impact on your standard of living and rising inflation will have multiple effects on an individual's consumption. As life goes on, the needs and demands of your family grow too. As the head of your family, you need to fulfill your responsibilities towards your loved ones and provide the comfort which they need. However, life is full of uncertainties and it is a need of every individual to sustain the same lifestyle for their family even when he/she is not around.
Hence, unless you are purchasing a term life insurance policy for only a few years, inflation should be an important consideration; the future value of money should play an important part in your calculations and hence the need to continuously evaluate your life insurance needs.


If you are interested in a longer term policy — for example, 20 or more years — or if you are obtaining a whole life insurance, then the future value of money should play a part in your calculations.


Why is inflation consideration so important in the context of insurance?


Most individuals when they purchase insurance, one consideration that is frequently overlooked is the future value of money. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of inflation are the 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%.


Time Factor of Inflation on term life insurance Policies


A term life policy is generally paid over a long period of 15, 20 or 30 years. The rate you pay for term life insurance is by definition usually a fixed rate that you pay over this span of time. Therefore, because 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. Which means, the purchasing power of rupee is reduced and — is not able to acquire the same amount of coverage benefit in terms of money as the previous year. The premium you pay per month for life insurance today will in rupees terms be the same, but will be less money 10 years from now due to inflation. Take this example – anything that could be purchased for . 10 lakh in 2011 would cost . 45 lakh approximately in 2031 at 8% inflation rate.


Solution: Increasing Term Insurance policies


An Increasing Term Assurance policy may provide the flexibility to increase the 'sum assured' (the cash amount that you receive upon your death) by 5-10% each year to reflect the rate of inflation. Thus it will hedge against the rising cost of living with an option of increasing the sum assured. It brings adequate financial protection at an affordable cost. Most companies also provide this enhanced insurance with appropriate rider options at a nominal extra cost and reward for healthy lifestyle habits like non smoking etc, too.


Who should buy a term plan like this?


If you are concerned about the rise of inflation and you are buying a policy relatively young in life, for example just after starting a family, 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 would need to be certain that you would be able to support this increase. Speaking to a qualified insurance adviser to get full details about this type of policy and discuss whether an increasing term assurance policy is in fact the best policy for your circumstances would be a worthwhile exercise.

 

 

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