Inflation (the cost of goods and services rising over time) is subtly changing the game of Insurance planning for Indian households, and if your cover hasn't been looked at recently, it probably hasn't been keeping pace. Costs of premiums, claims and healthcare are all inflated, so a sum assured that sounded generous in 2014 may be covering to a bare minimum today. Investment-linked policies are exposed to inflationary shocks too: price erosion of assumed investment returns represents a big threat to your future life cover or pension fund. It's no longer enough to set up a plan and carry on; instead, you need to track it regularly, link any guaranteed sums to inflation, add the right kinds of riders and collateral covers serious illness, hospital cash, crisis covert weak term length and premiums so you're protected for tomorrow at the right price, in case you were underinsured at the moment you need it most.
Why Inflation Affects What Insurance Must Cover & Is Not Just "A Number"
We talk about inflation as an abstract percentage 4%, 6%, 8% but it is visceral in Insurance planning: it's the current cost of what your family will buy after a claim. The two most relevant categories are:
a. Medical inflation hospital expenses, surgeons, healthcare prosthesis, ICU charges, medicines and gasoline tend to grow at a rate higher than general inflation. These are attributed to the rise in health costs due to technology, newly introduced procedures and increasing hospital operating costs.
b. Family inflation cost of living (food, education, housing) increases the replacement income required to support a family.
The result, of course, is simple: a sum assured (either life or health) that secured a comfortable outcome five or ten years ago will buy much less for you today. If you don't wake up to this, it could be an expensive, but easily preventable, mistake.
Pro-Tip: Treat inflation as a multiplying factor the last time you updated these policies. If it’s been 7-10 years since you last calculated these cash sums, multiply by a roughly 6-8% inflation rate for a conservative figure, and you should have some underestimate.
Medical Inflation: the Unseen Force Behind Health Insurance
Medical inflation deserves special attention. It often outpaces headline inflation because of:
1. Use of high-cost (More advanced) procedures and implants,
2. reserved for (higher diagnostic costs, specialist fees, etc.);
3. Increasing hospital operating expenses and staff, and
4. The general upward drift of negotiated package rates for common procedures.
What this means for health insurance:
a. A cashless policy with a 5-lakh hospitalisation limit that seemed adequate a decade ago may not be enough if you need extensive surgery or are in the ICU for an extended period.
b. Sub-limits (for room rent, ICU, doctor's fees) and copay clause could pinch more as the expenses increase.
c. Increased premiums for health insurance are a result of the market alone, but if your sum assured does not increase with it, increased premiums do not bridge the genuine gap effectively.
Pro-Tip: Compare the plans in terms of sum assured, but also find out what that sum actually pays for now. including major surgery, ICU, a new range of modern prostheses, and long stays in hospital. Get companies to give you a standard claim scenario for a similar hospital, and you'll get actual figures.
Sum Assured Erosion: The Math That Every Family Needs to Do
Let us perform basic calculations as you should tonight. Imagine you were to buy term life 10 years ago for a cover sum of 50 lakh. Apply a sweet spot inflation rate (say 6% pa) for expense & medical inflation to calculate what 50 lakhs would need to be today to give you the same real value.
formula (rough): Future equivalent=Present sum x1+inflationyears
Therefore, after 10 years at 6%: 50 lakh x (1.06)^10=50 lakh x 1.79=89.5 lakh
That means your 50 lakhs cover now only provides around half the cover it provided ten years ago. If you want your family to get the same real cushion of mortgage clearance, children's education, maintenance and contingency, you are underinsured.
The bottom line: don't ask what the nominal figures were calculated by reference to the assumption of fresh prices. Re-cost the real fund requirements on current values.
Pro-Tip: For term cover, recalculate all needed cover on a needs basis assumption (debts + income replacement over X years + education + buffer) and price to your existing policies.
Inflation & Life Insurance: Choose the Appropriate Type of Coverage
Life Insurance is available in different forms. The Impact of inflation on them varies.
a. Term life insurance (pure protection)
Pros: Cheapest way to buy a high sum assured. Easy to top up with another term policy or rider.
Inflation effect: a fixed amount assured is eroded by therefore, think about inflation-indexed riders or take a larger initial cover with planned future top-ups.
b. Endowment/traditional saving policies
Pros: merge the deposit with the collection.
Cons: antiquated endowments may not perform well after inflation; returns may be poor when measured in inflation-adjusted terms. Although the maturity amount is guaranteed, it might be insufficient when inflation is taken into account. The reality is that most legacy endowments will underperform inflation + their expected return.
c. Endowment/traditional saving policies
Pros: Its equity-linked returns could outperform during short-term periods of higher inflation.
Cons: market risk and charges; if you bought long-term plans 10 years ago, you might be disappointed with the current value, and ULIPs combine Investment and Insurance > buy separate term insurance for pure protection.
d. Increase cover riders & indexation
Numerous riders increase the sum assured by a set percentage per annum (say 510%). While this keeps pace with inflation, note the increase in premium. Will the riders' escalation rate be realistic given the anticipated rise in medical and general living costs?
Pro-Tip: For core protection, I suggest establishing a base term policy sufficient in size for any long-term needs and then (a) take up an inflation rider if available at a reasonable premium or (b) make systematic top-ups every 23 years rather than getting locked into more costly bundled products.
Strategies for Health Insurance in a World of Inflation
Health is perhaps the most affected by inflation, so take aggressive action here.
1. Select appropriate amounts and adaptable top-ups:
a. Opt for higher hospitalisation limits, if affordable. Many families want to cut costs here, but this may prove costly in the future.
b. Decide between family floater plans or individual covers in the early years; floater covers may be more efficient, but may leave one or more members underinsured over the long-term. As the family expands, revisit these choices.
2. Be mindful of sub-limits and exclusions:
a. Many plans have room-rent sub-limits or per-day caps, which, through inflation, become deadly liabilities for coverage.
b. Avoid specific exclusions that can lead to unforeseen costs.
3. Select super top-up plans:
Super top-up plans are effective once you have defined a threshold limit, but need not be spent upon till a specific claim occurs, a valuable shield for extreme, however unlikely, eventualities.
4. Use wellness riders and preventive care:
Coverage for things like checkups, diabetes and blood pressure management, early intervention, whatever reduces future claims is a boon both to the insurer and to you, keeping potentially astronomical expenses within control.
Pro-Tip: Revisit your health cover plan once a year, boost sum assured to beat the effects of medical inflation, opt for a super-top-up plan wherever possible, and check for dental coverage if you have a young family with known health issues.
Premiums & Inflation: A Double-Edged Sword
Inflation raises the cost of claims, which in turn causes insurers to increase premiums, but this is a double squeeze for the policyholder since:
1. In increased premiums (higher cost to keep the same nominal cover).
2. Cover the remaining. (Nominal same assured yields less in real terms).
How to respond:
a. Lock in long-term policies at younger ages where the prices are lower, but the sum assured is large enough in real terms.
b. Use riders appropriately. An indexed cover rider may be more expensive each year, but it will keep pace with inflation.
c. Plan a budget for increases in premiums. Treat increased premiums like an increase in the cost of living.
Pro-Tip: If premium increases can't be justified, don't just let the policy lapse. Think about converting it to a paid-up reduced sum assured or purchasing a smaller standalone term policy instead. Don't leave your family unprotected.
Inflation & Education Expenses: a Pressing Issue for Parents to Consider
Higher education inflation fees for schools, coaching to get into schools, and fees for foreign universities usually cost more than general inflation. Snaps at future fees for universities are often far off the mark.
Practical steps:
a. Innovate 34 years into the future and, using a conservative rate of inflation (8-10% for any 'international education' and 6-8% for home private institutions), estimate the cost of education.
b. Utilize dedicated child education funds (SIPs, PPF, recurring deposits) to anticipate the fee inflation; depend less on the belief that insurance maturity will take care of the fees.
c. Think of a separate child term policy and/or critical illness cover that hedges if the loss of parental income occurs at the most critical savings time.
Pro-Tip: Run a 15-year projection for each kid's cost of education and use 78% inflation assumption way more realistic than optimistic guesses, and will help you set more achievable goals.
Long-term Care, Disability, & Critical Illness: The Growing Expense of Incapacity
The worst inflation bite is family with a long-lasting disability or chronic illness. Outpatient and inpatient hospital costs, equipment, home adjustments and continuing treatment can eat away at a family's savings.
a. Critical illness cover pays a lump sum on diagnosis; choose policies with broad disease cover and increasing sum assured options. Lump sums must be sufficient in size to replace a family's income indefinitely and afford ongoing care.
b. The value of disability income cover (income replacement) increases as inflation rates increase: 30,000/month income this year will buy very much less in 10 years. Indexed or inflation-proofed income riders preserve living standards.
c. Long-term care plans are almost non-existent in India, but as the need for them increases, they are becoming more popular. For instance, set aside a small savings buffer for the purpose of long-term care if it's expected that your family history predisposes you to the problem.
Pro-Tip: Make sure the sums on critical illness are enough to pay the cost of all of these and preserve income flow into the future, and adopt a needs-based rather than insurer marketing approach.
Repricing Legacy Policies: What To Do with Outdated Products
Most families are holding old Insurance products with inconsistent economic assumptions. Common challenges:
1. Current low guaranteed yields on old endowments have failed to keep pace with inflation.
2. Funds invested in ULIPs years ago are left with high charges and lazily mediocre net yields.
3. Short-term policies purchased when income was lower.
Options:
a. Top-up: Purchase a further term plan to fill the gap instead of surrendering the previous policy, is often the cheapest.
b. Switch investments: again, if the ULIP or traditional is not performing well and the surrender penalties are falling, other investment options may be a good alternative.
c. Portability: modern insurers offer this and top-ups. Use them to get modern benefits (waiver of premium, accelerated payouts) and keep continuity.
Pro-Tip: Never surrender blindly. Sheer run of cash flows works out the surrender value today, projected future payouts (growing in line with inflation) and the cost of alternative covers. More often than not, it is cheapest to buy a new term plan and continue the old policy.
FAQs:
1. I bought my life policy 10 years ago for 50 lakhs. Should I buy a top-up or go in for a fresh term plan?
You probably need to top up. Use a needs-based calculation (debts + income replacement + education + buffer), inflation-adjusted to current prices. Buying an 'extra' term is generally faster and less expensive than replacing an existing legacy policy. You may choose to keep the old policy for now, in the short ter,m to lock in the protection levels and purchase a new term to make up the real shortfall.
2. How regularly should I increase my health insurance sum insured to counter medical inflation?
Annually check. Reasonable approach: add the base sum at intervals of 23 years or earlier if your family's consumption of health services, or local costs of medical care, increases significantly. Think about a super top-up too!
3. Are riders on inflation-indexed insurance worth the money?
They can be, but compare carefully. An indexation rider, which increases your sum assured by a set rate (e.g. 510% p.a.) protect your purchasing power but can significantly increase premiums year on year. Compare the cost of the rider with the cost of buying a new top-up every 23 years. Sometimes, staged top-ups are more flexible and cheaper.
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