Long-term financial plans could take a beating if inflation is not considered while making the investments
Inflation is one such thing which can put off your financial planning in both short term and long term. We experience the impact of inflation regularly in our daily lives when increase in prices of essential commodities ends up dis-balancing even our monthly expenditure plans. Similarly, long-term financial plans could take a beating if inflation is not considered while making the investments. More so, in case of determining insurance needs.
Life insurance policies are bought with the idea to provide a family the ability to sustain the lifestyle they enjoyed before the demise of the bread winner. But what we usually forget to factor in is that with growing income the lifestyle would change, which an insurance cover, which was bought earlier, may not be able to match. Another thing is that inflation could make maintaining a lifestyle an extremely costly affair, which could again jeopardise the benefits of a policy.
“At different life stages, your family’s needs differ. Rising inflation can have effects on an individual's consumption and their standard of living. Hence, it is essential that the future value of money should be considered for calculation when determining adequate coverage,” Vineet Arora, MD & CEO of Aegon Life Insurance said.
Money loses it’s value over the years due to inflation. A certain amount will not be valued the same as it is now in long term with its purchasing power declining. Hence, there is a need to consider the future value of money while making insurance investments. A term life policy is generally acquired for tenures like 15, 20 or more years. To ensure the sum assured (money that family receives after death of the insured) retains the desired purchasing value, it’s essential to revisit your portfolio and adjust the cover periodically.
“Life insurance offers a range of products to help achieve your financial goals - protection against uncertainties, paying off debts, child’s education, retirement, etc. It is essential to identify your needs and calculate adequate amount of coverage for the same,” added Arora.
One of the methods to plan for it is increasing term plans which will provide the flexibility to upgrade the sum assured every year to count for the inflation rate. The increasing sum assured should take care of increasing lifestyle costs.
Experts suggest that considering the history of inflation in India, a rate of 4 to 7 percent per annum should be considering while assessing insurance needs.
Life insurance policies are the first step towards securing the future of our family financial but factoring in inflation at time of deciding the sum assured will make it fool proof.