Retail inflation in India, touched 7.35% in December 2019, the highest in almost five years. The rise in the cost of fruits and vegetables was the main contributor to these numbers. Healthcare costs including medicines, hospital admission and doctor’s fees among others, have also triggered a rise in healthcare inflation, which has been growing at double the rate of overall inflation.
These rising costs have a direct impact on the quality of your family’s life as their needs and liabilities continue to grow. Thus, your investments for the future also need to be fine-tuned to ensure that your family is able to maintain a similar standard of living in the long term, despite rising inflation.
One such investment that inflation could have a direct bearing on is term insurance. It is important to factor in whether the term insurance plan you have opted for is enough to cover the needs of your family for the next 20 years, in spite of inflation.
Here are a few reasons why you should consider inflation when purchasing a term plan.
1. A decrease in purchasing power:Inflation can lead to a decrease in your capacity to purchase the same items 10 years down the line. By the time your insurance policy kicks into gear, the rate of inflation may have risen, so you end up purchasing less for the same amount of money as you could 10 years back. A term insurance plan bought 20 years ago would be exhausted faster than you could imagine, leaving your loved ones financially vulnerable.
If we suppose that the rate of inflation is between 5 to 8% in the coming few years, this would mean that there is a corresponding yearly decrease in the rupee by a similar percentage. A term plan wherein you pay the same amount as premium for the given years, will undergo erosion due to the inflation in prices and thus won’t offer similar benefits in terms of coverage as imagined at the time of policy purchase. To put things in perspective: at an 8% inflation rate, what costs 10 lakhs in 2011 would approximately cost 45 lakhs in 2031.
2. Increase in costs due to age and other liabilities: Not only does the price of goods witness a hike, but you own set of costs increase too. As you age, you and your spouse would likely begin to incur more medical and healthcare expenses. Moreover, your liabilities increase too. You may opt for loans to purchase your own house or vehicle. You may take out an education loan to finance your child’s higher education or may opt for a personal loan to finance their wedding expenses. In the event of your absence, your loved ones would be left financially vulnerable with increasing costs and rising inflation. As your own costs increase with time, the effect of inflation will hit hard.
3. Different goals, different rates of inflation: Term insurance is bought in order to help your family meet important milestones and fulfill certain goals in your absence. This could include taking care of your child’s educational expenses, allowing your spouse to enjoy retired life, and providing for medical expenses for your spouse, should the need arise. However, the rate of inflation for each one of these goals is different. The inflation rate of higher education can range from 10 to 20% while it is 8% for retirement and 15 to 20% for health expenses. Therefore, considering all these future hikes, it is important to make sure that the life cover chosen by you is cognizant of the cumulative increase in financial goals in the long term to provide financial assistance to your family in the time of need.
One way to beat inflation is to opt for a term insurance plan with increasing coverage. A term insurance plan with increasing coverage hikes your coverage by a predetermined amount every year. This ensures that the amount payable as a death benefit is sufficient to meet the finances of your family, even with inflation taken into account.
The iSelect Star plan from Canara HSBC Oriental Bank of Commerce allows you to avail of the benefits of increasing insurance coverage. When you opt for increasing insurance coverage, the sum assured payable to you increases by 5% every year your policy is active. This ultimately cumulates in a 100% increase from your original sum assured.
Opt for term insurance with an eye on inflation and tailor your policy accordingly to beat rising prices and keep them from making a dent in the financial health of your loved ones.
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