Asked by Erin  |  Submitted August 15, 2016

Do life insurance policies generally adjust for inflation? If I want my policy to adjust for inflation is there an additional cost?

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  Answers  |  1

August 15, 2016

No, policies do not generally adjust for inflation. If you want an inflation adjustment, try this: buy more coverage than you need today. If I ask you how much it cost to get your family through life last month and your tell me that it was $8,000, I would then take that down to $7,000 (since you will be gone). Multiply $7,000 by 12 (months). That is the annual bucket of money they need to keep living like they live right now. Want an "inflation rider"? Go back to $8,000; that is $1,000 more than they need for a year. Finishing touches: multiply the answer - $96,000 - by 10 and you have $960,000 for them to live on for the next 10 years with inflation added in. The amount of money in the bucket is the key; there is either more of it or less of it, and more of it is the answer to avoiding leaving less of it.

Other option, purchase Universal Life with option B (increasing face amount). It costs more than term, and the "inflation rider" concept is there since the face amount increases each year, but while this is a way to get it done, it isn't ideal. UL costs more, and the increase each year is more than inflationary increases in our economy may be.

Lastly, consider this. If you own a home and you are paying it off, the amount of death benefit in your policy is fixed (with term). As the amount at risk on the mortgage goes down, that leaves more of the face amount uncommitted to debt. Example: you owe
$200,000 today and you have $200,000 in life insurance. Ten years from now you owe $100,000 and you still have $200,000 in life insurance. See how in ten years, you have surplus coverage that is not aimed at mortgage debt - as it was 10 years ago? There is your inflation adjustment (as long as you don't add more debt, that is).


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