Inflation and Life Insurance: Will Your Payout Be Enough?

Inflation can devalue your life insurance payout over time. Learn how to prepare.
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Written by Georgia Rose
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Reviewed by Tony Steuer
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It can be hard to know how much life insurance you need, especially when inflation keeps driving up the cost of living. Gas, housing, eggs: they're much more expensive than 20 years ago. If you buy a policy with today's prices in mind, it might not provide enough for your family to buy groceries or pay the rent in the future. 

We may be unable to avoid inflation, but we can prepare for it. Learning to factor the economy into your coverage can help you stay better prepared. 

Calculate for inflation 

The primary purpose of life insurance is to provide a safety net for anyone who relies on you financially. For example, if your salary covers the mortgage, utility bills and school fees, a life insurance policy can cover those expenses if you die. Calculating how much life insurance you need may include multiplying your salary by a certain number of years, adding up your debts and considering all the daily expenses you currently cover.

While these calculations are necessary, they don't account for inflation. When you buy coverage through a life insurance agent or broker, they may factor inflation in for you. But if you purchase coverage online, you may have to factor this in yourself. 

A simple way to do this is to use historical averages. For example, the average annual inflation rate for the 20 years prior to the pandemic (2000 to 2019) was roughly 2%, according to data collected by the Federal Reserve Bank of Minneapolis. 

But inflation does not always climb at a steady rate. For example, the consumer price index, which tracks the average cost of goods and services, soared 8% during 2022 and then climbed an additional 4% in 2023

Federal Reserve Bank of Minneapolis. Consumer Price Index, 1913-. Accessed May 29, 2024.
. So if you factored in a rate of 2% when calculating your coverage, the current rates may feel like a huge gap. 

One way to combat this is to use an inflation rate that is realistic to your needs. Your policy type, policy length and financial obligations can help you build a custom plan. For example, planning for 8% annual inflation may not be realistic for a policy that you expect to last 30 years, but it may be practical for short-term coverage that could pay out in the next few years. 

Think about the types of expenses you want the policy to cover. Some costs, like fixed mortgage payments, aren't as heavily affected by inflation, while others, like groceries and utilities, can change significantly over time. Speak with an agent or fee-only life insurance advisor to find the right rate for your situation.

Also consider whether your need for life insurance will change over time. You might need more coverage in the future if you plan to buy a home or have children. Over the years, as your mortgage is paid off and your kids become self-supporting adults, your need for life insurance may decline — making inflation less of a concern.

Consider a cost-of-living rider

If you’re buying a new policy, a cost-of-living rider can help your coverage keep pace with inflation. This rider, an optional add-on when you purchase a policy, typically increases the death benefit in step with the consumer price index. As a result, your premiums will increase alongside any increases made to the coverage amount. However, not all companies offer inflation riders and the cost may differ among insurers.  

Buying a new policy during high inflation

Like other consumer products during severe inflation, the cost of new life insurance policies may go up. But holding off until prices level out isn't necessarily the best move. If you die without coverage, anyone who depends on your income could be left in a financial bind.

Term life insurance — the cheapest type of coverage — is probably all you need. It lasts for a set number of years and doesn't build cash value like whole life insurance, but the lower premiums mean you can get affordable, temporary coverage while costs are high. 

Reassess your coverage regularly

It's a good idea to review your policy annually as part of a general financial health check. For example, if you go through a significant life event, such as buying a house, getting married or having children, you may need to increase your coverage. Similarly, you may want to lower your death benefit if you no longer need as much coverage. When adjusting the policy's face value, speak with an agent or life insurance advisor about how the new amount should be adjusted for inflation.

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