- Inflation drives up the cost of everything, which can diminish the value of a life insurance policy's death benefit.
- Many insurers offer inflation riders to combat this.
- It's a good idea for all policyholders to review their life insurance coverage periodically to ensure it's still sufficient.
Don't put this task off for too long.
It's pretty difficult to ignore the effect that inflation has had upon everyone over this last year. Everything from gas to groceries has gotten more expensive, and a lot of people are still trying to figure out how to cope with that.
While day-to-day bills are understandably the top priority, those with life insurance can't forget to look at what effect inflation is having on their policy as well. Here are two things policyholders can do to ensure their family members are well protected, no matter what.
1. Choose a policy with an inflation rider
Inflation riders are optional endorsements that policyholders can add if they want to ensure the buying power of their death benefit remains consistent over time. It may make a life insurance policy a little more expensive, but it'll also ensure that beneficiaries are well provided for, should the policyholder pass away now or many years into the policy term.
Life insurers often give policyholders a choice between a simple inflation rider and a compound inflation rider. Simple inflation riders increase the policy's death benefit by a certain percentage every year. If a policy has a $100,000 death benefit, for example, and a 3% simple inflation rider, its value would increase by 3% of the policy's initial value, or about $3,000 per year. So after one year, the death benefit would be $103,000, after two years, it would be $106,000, and so on.
A compound inflation rider uses compound interest to determine the death benefit increase. Returning to our example of a $100,000 death benefit, if the policy had a 3% compound inflation rider, its value would be $103,000 after the first year, same as with the simple inflation rider. But in the second year, the death benefit would go up by 3% of its current value -- $103,000 -- making it $106,090. And this difference will only get larger over time.
Compound inflation protection typically costs more than simple inflation protection, but it may also do a better job of keeping the death benefit in line with rising costs. If a life insurer gives both options, it doesn't hurt to price out each one to see what the difference is.
2. Review the policy's limits annually
Those who don't have an inflation rider on their policy may still want to periodically review their coverage to ensure it's adequate for their needs. If they feel that their initial death benefit won't go as far as they want it to, they may want to consider purchasing additional coverage.
It's worth noting that life insurance typically gets more expensive as people age, especially for those who take up habits like smoking or develop serious health conditions. This could make it difficult for some people to purchase additional coverage, even if they want to. But not everyone will see a massive increase in their premiums.
Keep in mind that inflation isn't the only thing that can change the desired death benefit. Adding a new family member or a child moving out could affect how much coverage the policyholder feels they need. Take all of these things into account when deciding how much life insurance to buy.
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