Unless you are at the age of 60, and the only worry about occasional delays in your pension, you are likely to have a growing living cost. Cost of living will continue to increase in the long run is a universal economic fact. If you are in your 20s or 30s, your family, financial and personal financial needs will also grow. Meaning your lifestyle 10 years from now will be very different and slightly more costly than it is today. This growth is personal as well as due to inflation. Hence, even when you are planning for retirement, you should consider inflation. In fact, due to inflation, your expenses will keep on growing even if you somehow manage to maintain a steady lifestyle.
Inflation Impact on Your Financial Needs
Inflation is one of the most influential factors while planning for long-term financial goals. Inflation is the reason you need to invest your money, else it starts to lose its value.
For example, if you have Rs 1 lakh right now you have two options:
a) You can keep it in your pocket. In which case over 10 years, it’s real value will be about Rs. 61,000, if we assume a 5% p.a. inflation.
b) Otherwise, you can invest the money at 7% p.a., in which case 10 years later you will have approximately Rs. 1.97 lakhs. The real value of this money after inflation will be about Rs. 1.2 lakhs.
You can imagine why most of the financial goals you are investing in will need way more than the present cost of the goal. Also, your family’s regular financial needs like kitchen and lifestyle expenses will keep growing.
Inflation & Term Life Cover Need
Your term life cover need is based on your human life value (HLV). HLV indicates your total financial value at the moment, based on your present income or expenses. Thus, your HLV will increase as your income or expenses increase.
For example, if you are 30 years old and earning Rs. 24 lakhs per annum your HLV would be about Rs. 3.5 crore (approximately 15 times annual income), assuming you will retire at the age of 60.
However, if at the age of 35 you would be earning Rs. 30 lakhs, your new HLV would be about Rs. 4 crores.
If you want to estimate your HLV growth based on your expenses, it will be similar. However, in that case, you will need to estimate the growth in the value of your financial goals separately. Thus, the income method is easier and simpler to follow.
Once your HLV has grown significantly, as in our example, you should consider increasing your term life cover to match the new number.
How a Growing Life Cover can Help you Beat Inflation?
Getting a term life plan where you can increase your cover without buying a new term cover has many advantages. The biggest advantage is in the cost savings when you try to increase your life cover at a higher age.
The increasing term cover plan does not charge an extra premium with every increment. Instead, your premiums remain the same throughout your premium payment term.
With the life-stage increment option, your premium will increase with each increment. However, it will be significantly lower than a new term plan. Also, you may not have to appear for a medical examination as you are an existing policyholder for the insurer.
Other Factors Influencing Your Term Life Cover
Inflation is an important factor prompting HLV growth, however, it’s is far from the only factor. Apart from inflation, you have many life events which add to your financial responsibilities, influencing your HLV growth.
Few of the most important life events are as follows:
1. Marriage or start of family life
3. Purchasing of home with a home loan
In all such cases, your term life cover needs to significantly increase to cover the newfound responsibilities.
How To Increase Your Term Life Cover?
There are three ways you can have your term life cover to grow along with your financial needs:
a) Buy a new term cover every few years
b) Buy a growing term cover
c) Get a term plan which gives you the option to increase the cover with major life events
1. Buying New Term Life Cover
If you already have a term life cover and now find your HLV significantly higher, you may have no other option but to buy a new plan. However, this is not recommended for the future.
Your term life cost can increase significantly as you age. Thus, every time you add a new term policy to your portfolio, the cost of your new insurance cover will be significantly higher than the earlier one. This is especially true once you cross the age of 35.
2. Growing Term Cover
Growing term cover is a great way to ensure that your life insurance cover keeps growing every year automatically. However, this type of cover is better if you are already married, have children and bought a house.
Since you have already crossed these milestones in life, your term cover only needs to keep up with your income and lifestyle growth. However, if you are still early enough to cross these milestones, the term cover with life-stage increment option would be better.
3. Life-Stage Increment Option in Term Plans
Life stages which mark a new chapter in your financial and social life demand increment in your term cover as well. Few term insurance providers, including Canara HSBC Oriental Bank of Commerce Life Insurance, offer online term insurance plans with this option.
iSelect Star Term Plan has the option for both automatic annual increment and life-stage based increment. In life-stage increment option, you can request the insurer to increase your term cover under the existing policy.
Thus, having a term plan like iSelect Star Term Plan offers you more advantages when it comes to keeping your life cover at par with your HLV.