Curious what components of life insurance rise with inflation? With a U.S. inflation rate currently more than 9%, many people are wondering what it means for the cost of life insurance. Will your policy premium go up? What does it mean for policies with cash value, like whole life insurance? And what does rising inflation mean for your policy’s death benefit?
In this article, we’ll cover what happens to the cost of insurance policies during inflation and how inflation affects the rate of return on your policy.
LIFE INSURANCE COSTS & RISING INFLATION
Like most consumer goods, when inflation hits, prices on life insurance can go up. This can be bad news if you have a permanent life insurance policy with flexible premiums, like universal life insurance, where your insurer can decide to raise costs. But if you have a whole life insurance policy, your policy has fixed premiums. This means whatever you’re currently paying, you’ll continue to pay for the duration of the policy, regardless of rising inflation.
Term life insurance policies generally have fixed premiums, but check with your provider. If your policy expires before you pass away, you may need to renew your insurance policy at a higher premium.
If you aren’t currently insured and are looking to buy life insurance, whole life policies provide better protection against inflation than other types of life insurance. But if a whole life policy is cost prohibitive right now, don’t wait to get coverage. A convertible term life insurance policy can give you the coverage you need at a low price, and you’ll have the option to convert it to an interest-earning whole life insurance policy at a later date—without the need for a medical exam. This will help you lock in the best premium and insurance rating.
DOES MY RATE OF RETURN ON LIFE INSURANCE RISE WITH INFLATION?
Right now, to combat high inflation, the Fed has rapidly raised interest rates, making it more expensive to borrow money from banks and third-party lenders. Whole life insurance allows you to act as your own bank, and borrow money from the cash value of your life insurance policy. Whole life insurance policies also earn a guaranteed rate of return, historically around 4-5%, that isn’t affected by inflation, but mutual life insurance companies also pay out non-guaranteed dividends on whole life policies that may be affected — in a good way.
For your insurance company, rising interest rates work in their favor by increasing their bond yield and investment income. When your mutual insurance company is profitable, you’re eligible for dividend payments. So, in a scenario of rising inflation and simultaneous rising interest rates, you may benefit. What’s more, when a life insurance company is profitable from their investments, they don’t need to raise premiums to cover costs — purchasing from an A-rated insurance company with good investment standings may provide the best premiums and earnings even in times of inflation.
FINDING THE BEST POLICY TO COMBAT INFLATION
At Paradigm Life, we work with the nations top-rated mutual life insurance companies to find the best policy for your financial goals. We can help you beat inflation by customizing your policy with policy riders, like a paid-up additions rider, which allows you to “overfund” your policy in its early years and supercharge it for growth to keep up with inflation.
If you want to use your life insurance policy to generate business capital, send your children to school, or purchase real estate, we can show you how to maximize its potential and take advantage of policy loans to put borrowing power in your hands. If your primary goal is to use life insurance for retirement, we can build a policy that is paid-up by your retirement date, or one you can use to fund an early retirement without penalty. If you want to leave a financial legacy for your heirs, we can show you how to use life insurance as part of an estate plan and take advantage of tax benefits specifically available with life insurance, helping you keep more of your wealth in the family.
Don’t let the rise of inflation get in the way of your financial freedom.
Q: Does the cost of life insurance typically rise with inflation?
A: The cost of life insurance can be influenced by various factors, including inflation, but it doesn’t always rise with inflation. The impact of inflation on life insurance costs depends on the policy type, insurer, and individual circumstances.
Q: What factors can affect the cost of life insurance over time?
A: Factors influencing life insurance costs include the policyholder’s age, health, coverage amount, policy type, and the insurance company’s pricing. While inflation can play a role, it’s just one of several factors.
Q: How can individuals manage and plan for potential cost increases in their life insurance policies due to inflation?
A: Individuals can consider purchasing policies with inflation-adjusted riders, reviewing and adjusting their coverage as needed, and periodically comparing insurance options to ensure they have the most cost-effective coverage for their circumstances.