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Your rising income will have a natural impact on your standard of living and rising inflation will have multiple effects on an individual's consumption
YOUNG Indians today are an optimistic and confident lot ready with a blueprint for their life and goals to achieve. However, very often, they are not prepared for the vagaries of fate and how it could throw their as well as lives of their loved ones out of gear in absence of adequate financial security.
But rising inflation and planning for insurance cover are usually done in isolation, and the learning don't necessarily converge for consumers to be able to look at the complete picture. While the rule of thumb states, you should look at a life cover of around 12 times your annual income deducting your investment assets plus any liabilities. It is also important to consider another mix -your rising income and increasing inflation. Your rising income will have natural impact on your standard of living and rising inflation will have multiple effects on an individual's consumption.
As life goes on, the needs and demands of your family also grow. As the head of your family, you need to fulfill your responsibilities towards your responsibilities towards your loved ones and to provide the comfort which they need. However, life is full of uncertainties and it is a need of every individual to sustain the same lifestyle for their family even when he/she is not around.
Hence, unless you are purchasing a term life insurance policy for only a few years, inflation should be an important consideration.
The future value of money should play an important part in your calculations and, hence, the need to continuously evaluate your life insurance needs.
If you are interested in a longer term policy -for example, 20 or more years -or if you are obtaining whole life insurance, then the future value of money should play a part in your calculations.
Why is inflation consideration so important in the context of insurance? Most individuals frequently overlook the future value of money while buying insurance.
Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well-known measures of inflation are the CPI (consumer price index) which measures consumer prices, and the GDP (gross domestic product) deflator, which measures inflation in the domestic economy.
The inflation rate in India was last reported at 10.1 per cent in September 2011. From 1969 until 2010, the average inflation rate in India was 7.99 per cent.
The cost of healthcare and education have also increased rapidly, at times, much faster than other areas of the economy. So, to plan for the future needs of your family, it is wise to calculate the rate of inflation for education and healthcare independently of regular living expenses.
Inflation is a real risk for all ages since the future value of money may not support your present lifestyle.
Time factor of inflation on term life insurance policies: A term life policy is generally paid over a long period of 15, 20 or 30 years. The rate you pay for term life insurance is by definition usually a fixed rate that you pay over this span of time. Therefore, because the rate of inflation is commonly in the range of about 7-9 per cent annually, the value of the rupee decreases by this percentage each year.
This means that the purchasing power of rupee is reduced and is not able to acquire the same amount of coverage benefit in terms of money as the previous year.
The premium you pay per month for life insurance today will in rupees terms be the same, but will be less money 10 years from now due to inflation. Take this example anything that could be purchased for Rs 10 lakh in 2011, would cost Rs 45 lakh approximately in 2031 at 8 per cent inflation rate.
Solution -increasing term insurance policies: An increasing-term assurance policy may provide the flexibility to increase the `sum assured' (the cash amount that you receive upon your death) by 5-10 per cent each year to reflect the rate of inflation. Thus, it will hedge against the rising cost of living with an option of increasing sum assured.
It brings adequate financial protection at an affordable cost. Most companies also provide this enhanced insurance with appropriate rider options at nominal extra cost and reward for healthy lifestyle habits like nonsmoking, too. Some policies also have a special discount for women.
Who should buy a term plan like this? If you are concerned about the rise of inflation and you are buying a policy relatively young in life, for example, just after starting a family, this may be a suitable option for you. However, it is worth noting that the cost of your insurance premium is also likely to rise to reflect the increased sum assured. So, you would need to be certain that you would be able to support this increase. Speaking to a qualified insurance adviser to get full details about this type of policy and discuss whether an increasing term assurance policy is in fact the best policy for your circumstances would be a worthwhile exercise.
While an innovative policy incorporating inflation dynamics is the need of the day, it is also important one selects insurance providers that offer efficient claims processing services. Claims performance is an important yardstick to measure the performance of an insurance company and, hence, should play a very large role in decision making process before committing to an insurance policy. There is sufficient regulatory governance around the claims handling process and there are defined guidelines for the companies to follow. This makes it very easy for the customers to access this information and make informed choices.
As you can see, inflation does have a direct corelation with any term life policy you choose. If chosen wisely, this can efficiently help circumvent rising inflation for family, if, faced with any unforeseen circumstances
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