What is Inflation
Inflation is defined as a general increase in prices, which leads to a reduction in the purchasing power of each unit of money. For instance, if a pack of chips was priced at $2, you could buy five such packets with a $10 bill. However, if the same chips packet started selling at $3, a $10 bill would only be able to fetch 3 such packets.
How Does Inflation Affect My Insurance Rates?
In order to understand how inflation can affect insurance cost and rates, let us start by understanding what insurance is. You can think of insurance as a ‘monetary instrument’, which means that it is a binding agreement between a company and an individual. According to this contract, the individual will make smaller, periodic payments to the company. In return, the company will make a potentially larger payment to this individual, at some point in the future.
Since insurance is a long-term monetary instrument, it is more susceptible to the impacts of inflation compared to a present, one-off transaction. Of course, there are many different kinds of insurance, such as:
- Life
- Health
- Disability
- Homeowners
- Auto
- Long-term care
- Mortgage
Some of these insurance types have shorter durations (that is, they are renewable every year) while others can stretch over several decades. The length and type of the insurance term are arguably the main factors that will determine how much the insurance rate is affected by inflation.
What is ‘Inflation Guard?’
An ‘inflation guard’ is a kind of protection that policyholders can use to shield themselves against the effects of inflation. The inflation guard is an agreement that stipulates that the insurance benefit value will increase by a predetermined percentage over a predetermined time period. Such protection is particularly useful for individuals looking to purchase longer-term policies (such as long-term care or life insurance). Such policies need to be purchased several years prior to when they will actually be used.
Inflation guard can also be useful in cases where an individual wants to purchase a disability insurance policy, but is concerned about the future increases in medical expense. Such protection can help mitigate the impact of such long-term cost increases.
You can add an inflation guard to your insurance policy, against an additional expense that will impact your premium payment. You must remember that an inflation guard does not exempt you from enduring increases in premium (unless you have agreed upon a fixed premium for the entire contract length).
Final Word:
In general, the longer the life of the insurance policy, the more vulnerable it is to inflation.
To learn more about the impact of inflation on insurance, and the steps that you can take to mitigate this impact, feel free to reach out to us and schedule a consultation. You could also go through some of the other blogs on our website and get a better understanding of how insurance works.
