Is Life Insurance a Hedge against Inflation?

We’re all feeling the effects of global inflation, from food to fuel prices and beyond. Not surprisingly, this has many consumers asking: is life insurance a good hedge against inflation?

The short answer is: yes, life insurance does offer built-in protection against inflation. Better yet, there are coverage options you can choose to better “inflation-proof” your policy. If you’re thinking about buying life insurance, here’s some facts to keep in mind.

How Inflation Impacts Your Finances

Inflation refers to the sustained increase in the general price level of goods and services in the economy over time.

While moderate inflation is generally considered healthy for the economy, high levels of inflation make it more challenging for consumers to manage their finances. Specifically, inflation can negatively impact you by:

Reducing Your Purchasing Power – As prices rise, the value of your money decreases. That means you need to spend more money to buy the same goods and services you previously purchased for less.
Increasing Your Cost of Living – As costs rise, you must allocate more of your income to cover basic needs, such as housing and food—leaving less money for savings or discretionary spending.
Eroding Your Savings and Investments – When interest earned on savings or investment returns doesn’t outpace inflation, the real value of those funds decrease. Not only are you spending more, you’re saving less!

The good news is, life insurance offers several unique features that can help minimize the impact of inflation—including these.

Tax-free Benefits Help Offset Inflation

One of the advantages of all types of life insurance—term life, whole life and universal life—is that death benefits are not subject to income tax. As a result, beneficiaries receive the full amount of the death benefit without a tax reduction, regardless of economic fluctuations. This helps life insurance maintain its intended value over time.

The Inflation-Fighting Power of Cash Value

Some forms of life insurance—i.e., whole life and universal life—include an important feature that combats inflation: accumulating cash value. (Term life insurance does not include cash value; its advantage is that premiums are cheap and affordable.)

Cash value is a component of life insurance policies separate from the death benefit. In addition to premium contributions, cash value earns interest over time.

With whole life insurance, cash value grows based on a fixed interest rate. With indexed universal life (IUL) policies, interest rates are linked to the performance of a specific stock market index, such as the S&P 500® Index¹. Policies that rely on indexed interest credit generally shine during inflationary periods, because that’s when interest rates are higher.

Furthermore, policyholders can take out loans against their policies’ cash value—and even then, cash value continues to grow. In effect, those dollars are working doubly hard against the effects of inflation!

Guaranteed Premiums

Another advantage of whole and universal life insurance is that premiums are guaranteed to remain the same throughout the life of the policies. While inflation can act as a stimulus that drives up the cost of many goods and services, life insurance policies aren’t one of them.

Keep in mind: inflation occurs every year. Since the year 2000, the annual global inflation rate has ranged from 2.73%-8.73%. Every year, you see this reflected in what you pay for groceries, fuel, utilities, etc.

However, guaranteed life insurance premiums remain the same. Considering that a policyholder may pay the same premium for 20, 30 or 40 years, that’s a remarkable savings over time.

Key Takeaway

Life insurance does offer protection against inflation—especially when you structure your policy carefully. Enlisting the aid of a professional insurance advisor can help you make the best choices, based on your goals and situation.

At Pan-American Life Insurance Group, we offer a range of quality life insurance solutions, and our highly-trained advisors know them inside and out.

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This article has been prepared for informational purposes only, and does not constitute personal advice. Consult with your own financial and tax advisor with respect to your personal situation. Some products may not be available in every jurisdiction where Pan-American Life is licensed to do business. All products are subject to exclusions and other applicable terms and conditions.

¹ The S&P 500® is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and has been licensed for use by Pan American Life Insurance Group. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Pan American Life Insurance Group. PALIG's Product(s) is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500®.