How to Protect Your Life Insurance Against Inflation

In general, you purchase your life insurance policy many years before the payout of the death benefit. But inflation can have a negative impact on the actual purchasing power the payout will give your beneficiaries. In this blog, we’ll discuss how you can protect your life insurance benefit against inflation.

Inflation, Purchasing Power, and Life Insurance Payouts

The inflation rate in the U.S. is typically around 3.8 percent. When inflation rises, it means your purchasing power—the amount of products or services you can buy per dollar—diminishes. In other words: Your money doesn’t go as far year over year.

However, in 2022, the rate of inflation was 6.4 percent. That’s significantly higher than normal and had an enormous impact on cost of living nationwide.

Clearly, you need to take inflation into account when buying life insurance. If you don’t, inflation will likely degrade the purchasing power of the death benefit over time. Consider the following example:

Let’s say a beneficiary of a life insurance policy receives a $200,000 death benefit in 2023. How much would the death benefit need to be to get the same purchasing power in 2050? According to SmartAsset’s inflation calculator, if the inflation rate remains at 6.4 percent, the life insurance policy payout needs to be $1,06712.

If you don’t take inflation into account, it would likely mean the actual purchasing power of the sum your beneficiaries receive is much lower than you intended when you bought the policy.

How to Protect Your Life Insurance Payout Against Inflation

Fortunately, there are several ways you can protect your death benefit against inflation:

  • Cost-of-living rider: A cost-of-living rider is an addition to a life insurance policy that allows your policy to increase in value over time so it keeps up with rising inflation. After you pass away, your beneficiaries will receive a larger death benefit from the policy.
  • Whole life insurance: A whole life insurance policy provides good protection against inflation because the death benefit is guaranteed to increase at a specific rate each year. The cash value of a whole life insurance is guaranteed increase at the same rate as the death benefit. That means it will also keep up with inflation. However, whole life insurance is typically the most expensive form of life insurance.
  • Index-linked life insurance: Some life insurance companies offer indexed-linked life insurance, which links your premiums to factors that are inherently tied to inflation. These include the average earnings index and the consumer price index. Because your policy is directly linked to inflation, it retains its long-term cash value. Note, however, that in most cases, you need to activate this option when you purchase your life insurance policy.
  • Periodic premium boosts: To boost the amount of the death benefit without having to commit to the high premiums or additional costs of the options above, you can simply periodically increase your premiums when it’s convenient for you. By doing so, you build up a larger cash value and death benefit.

Get Expert Help

It’s best to have a good understanding of all your options before choosing how to protect your life insurance against inflation. At Liberty Financial Group, our experts are standing by to give you all the information you need to make the right decision. Contact us today to learn more.