It has been many years since U.S. consumers have experienced the jolting effects of double-digit spikes in inflation. Over the last 20 years, the average yearly increase in the Consumer Price Index (CPI) was around 3 percent.
An inflation rate of 3 percent may seem good by historical standards and is probably not enough to worry most Americans. But if you have a life insurance policy, you may want to consider the cumulative effects of 20 years of inflation on your eventual death benefit.
The inflation rate, or CPI, measures the price changes of common goods and services purchased by urban households. Over time, prices can rise significantly, decreasing the buying power of your dollars.
For example, a $200,000 death benefit paid in 2004 would have the same buying power as a $110,000 death benefit in 1984, according to the Bureau of Labor Statistics.
Thus, if an individual had purchased a life insurance policy 20 years ago, the current value of the death benefit would seem like much less today than when the policy was purchased.
Upon review, you could find that the death benefit of a policy purchased many years ago would not provide the standard of living for your family that you once imagined. If so, you may need to purchase additional insurance coverage to help bridge the gap and make up for the effects of inflation.
If you are just now purchasing life insurance, don’t forget to think about the potential for inflation over the next 20 years or more. It’s impossible to predict the inflation rate over time, but it could potentially rise more than it has during the past two decades.
With the cumulative threat of inflation looming, you may want to consider purchasing a larger death benefit than your family would need by today’s standards. Please call if you would like to review your life insurance needs.
Inflation adjustment
? In long-term-care insurance, an inflation adjustment option increases the dollar value of your benefit by 5 percent each policy year, to keep pace with estimated inflation in the cost of long-term care.
The kinds of inflation adjustment are:
? Compound-interest increases: The annual benefit-increases compound at 5 percent per year. The premium is highest on this type because this is the highest increase in benefit. This is probably the best choice if you are under age 65 because of escalating costs of health care.
? Simple-interest increases: There is a 5 percent benefit increase each year, calculated as simple interest. This choice might be best if you are 65 to 70. The compounding interest-rate benefit doesn’t overcome the simple interest-rate benefit until 12 to 14 years into the policy.
? Flat benefit: There is no change in absolute value of the benefit over the years. This is the least expensive option. This is the best choice if you’re in your early to late 70s.
Note that inflation protection options can make premiums cost 50 percent more.