2022’s economy is looking grim, to say the least. We can lay the blame in several places but laying blame does not mitigate inflation – only sound economic strategies will.
Today, Americans are facing $5 per gallon gas prices and diesel doubled in the last 18 months. We’re dealing with increases across the board for groceries and most other commodities that American families need and rely on every day.
If a product has to be shipped by truck, train, air, or ship, it’s going to cost us more because of skyrocketing fuel costs. And the worst part is that inflation can materialize almost overnight. Certainly, those “in the know” attempted to warn us, but who really pays close attention to “those in the know?”
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TheStreet.com, a popular and reputable financial firm that follows the markets and economy, defines inflation as
“the rate at which the prices of products and services change over a given period of time (usually a year). Simply put, when inflation rises, consumer spending declines because when prices go up, people can’t afford to buy as much.
For the purpose of this article, we will drill down and see if inflation has a bad, good, or no effect on life insurance.
Will Inflation Cause my Life Insurance Rates to Go Up?
It’s only fair to start with good news. If you are concerned that today’s or tomorrow’s inflation can cause your insurance rates to go up, don’t worry, because they won’t.
Once your life insurance policy is issued, your rates are locked in for the life of the policy, whether it’s a term policy or a permanent policy like whole life insurance.
Term Life Insurance
If your policy is term insurance, you’ll only need to worry about rate increases when your policy expires or if you renew it.
This is more the reason if you’re looking to buy term life insurance now, consider buying the longest term that your budget will allow. Term policies were generally available from 5 to 30 years but lately, depending on your age, there are several life insurance companies offering 35 and 40-year policies.
There are some companies out there that sell term life insurance policies that have rates that adjust (always up) every one or five years. Don’t buy those. They may be cheaper upfront but in the long run, you’ll pay more for life insurance than if you’d purchased a 20 or 30-year policy.
So then, if you have a term life insurance policy now that has 5, 10, or 20-years left on it, take a breath and relax. But remember, if you renew it or convert it at the end of the term, the rates will be based on your age at renewal and will be significantly higher.
Whole Life Insurance
Like level term life insurance, once your whole life insurance policy was issued, the insurance company cannot increase your rates for the rest of your life. Although whole life or universal life insurance costs significantly more than term life insurance, part of the premiums you pay are diverted to a cash-value account.
Even better, is that your money grows in cash value over time because the cash value account earns a guaranteed interest rate which is credited to your account tax-deferred. And, if your policy was purchased from a mutual insurance company, you will earn dividends that can be used to buy paid-up life insurance (small additional policies that earn interest and dividends). This means that you’ll only pay taxes on the interest credited to your account if you choose to withdraw it, and if you withdraw only the portion that is considered premium, the withdrawal is tax exempt because the premiums you’ve paid were from after-tax dollars.
What about the Effect of Inflation on My Budget?
Excellent question! Many policyholders fail to consider how essential life insurance is for financially protecting their family. These are the policyholders who cancel or cash in their life insurance policies when times get very tough (like right now).
Before we discuss how you might avoid canceling your policy because inflation is killing your budget, let’s discuss why you bought your policy in the first place and what could happen if you cancel and then try and purchase a new policy when the inflation subsides and your budget becomes stable again.
Why you Bought Life Insurance
The majority of life insurance policyholders purchase life insurance to provide the money needed for surviving loved ones to continue on financially after they’ve died. Most people want to be able to replace their income for important needs such as:
- Living expenses for surviving loved ones
- Pay off the mortgage for the family home
- Provide the funds needed for college expenses for a child or children
- Provide the funds needed for a surviving spouse’s retirement plan
There is also a subset of people who are forced to purchase life insurance because of a divorce decree. If this is you, you will not have the option of canceling your life insurance without substantial repercussions from the court.
Finally, there is another subset of individuals that purchase permanent life insurance to fund a LIRP (Life Insurance Retirement Plan), and canceling this life insurance is like canceling a 401(k) without the penalties.
What Can Happen When You Need to Replace a Policy You’ve Canceled
Canceling a life insurance policy with the intent to repurchase it down the road is dangerous because life happens.
What we mean by this is that the rates on the policy you’re considering canceling were primarily based on your age, health, and death benefit. So then, what happens if you are diagnosed with an illness between now and when you attempt to replace the canceled policy? First, you’ll be older, and second, your illness could impact your rates.
Additionally, if life insurance companies begin to feel the financial impact that families are feeling, you can be sure that many companies will take rate increases because of their expected increases in operating costs. Just remember, before you pull the “cancel” trigger, life happens!
Reducing Your Budget so You Can Keep Your Life Insurance
Certainly, most people cringe when they realize they need to reduce monthly expenses in order to afford critical items like life insurance. However, when you’re forced to make some difficult decisions for the greater good like financially protecting your family, those difficult decisions can be immensely rewarding to those who love you and depend on you.
But remember, inflation is never permanent. I can remember the days of Jimmy Carter when I was paying 12.5% interest on my mortgage and having to wait in line for up to an hour to buy gasoline. History tells us that most inflation crises are resolved as soon as a new administration enters the White House or a different party takes back (or takes over) the congress and the senate.
Almost every individual or family can find ways to cut their monthly budget, but some minor sacrifices are needed. Here are the usual suspects that we can do without at least temporarily:
- Cut back on eating out
- Forgo the family vacation for a year or two (this is huge)
- Keep vehicles in good running condition rather than trading
- Reduce your electric and water bill through conservation and awareness
- Cancel streaming subscriptions like Netflix, Hulu, and Prime Video
- Cancel cable TV and buy an indoor or outdoor antenna
- Cut back on gasoline usage
- Shop your car insurance every 6 months (should be doing this anyway)
- Pay down or pay off high-interest loans and credit cards
- Cut your spending on groceries wherever possible
- Make your coffee at home rather than paying $5 – $7 at your local coffee shop.
Certainly, this is not an exhaustive list, and there are probably some on the list that you’d like to fight about, but the most important item that didn’t make the list because you should never consider it, is canceling your life insurance.
What about the Life Insurance Companies?
Fortunately, it’s doubtful that life insurance companies will get into financial trouble because of inflation (remember, it’s temporary). However, if you selected a life insurance company that has not demonstrated solid financial stability, there are no guarantees that the company will be there when you need them.
This is why it’s critical that you only purchase life insurance from a company that has “A” or higher ratings from the national rating services. Although most states have a “guarantee fund” that protects policyholders if a life insurance company goes belly up, who’s to say that there will be enough to go around when a company has to call it quits.
Remember, a life insurance policy is simply a promise to pay a benefit in exchange for a premium. However, that promise must be kept by the company for the rest of your life. Never choose a “B” rated insurance company to save a few dollars in premiums.
There is no doubt that all Americans, especially those who were already struggling, are deeply concerned about inflation and life insurance. We have to eat, get to work, and take care of our families.
No doubt that the latter is most important to most Americans and as such if you consider life insurance non-essential, you’re making a huge mistake.
If you are considering life insurance now or concerned about your ability to afford a policy you already have, call us at 866-868-0099 during normal business hours or contact us through our website.
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