Inflation is the increase in the average price of goods and services. During periods of high inflation, money buys a smaller percentage of both.

While the Federal Reserve tries to maintain a steady 2% inflation rate every year, the number falls dramatically during economic headwinds, such as those experienced during the coronavirus pandemic.

Domonique Rodgers of NC state says that no matter the type of inflation, it affects purchasing power — life insurance included. Despite whole life coverage being more expensive on the surface, term life insurance gives policyholders less than they pay for during recessions.

Protecting money from inflation is vital when individuals determine which life insurance coverage to purchase. Thus, understanding the impacts of inflation on both policy types is crucial.

Inflation Impacts

Inflation impacts each dollar individuals own, even more so with the money they attempt to save. The longer dollars sit in savings accounts, the more value they lose.

Financial planners encourage individuals to consider inflation when saving for retirement. And they’ll generally state that beneficiaries will receive less death benefit than initially purchased should the policyholder choose term life insurance.

Buying a policy with a 30-year duration and a $1M payout to heirs equates to just $411,987, provided the holder dies close to the end of their coverage. To ensure beneficiaries receive the total $1M, the holder would have to purchase an original death benefit of almost $2.5M.

Not to mention that if the coverage holder dies on the 31st year, beneficiaries get nothing, as the policy would’ve expired.

On the other hand, a whole life coverage policy comes with an ever-growing death benefit. The specific increase depends on non-guaranteed dividends and guaranteed interest, which averages around 4% to 6% per annum.

Therefore, the death benefit outpaces inflation, making sure beneficiaries get the full spending power.

Considerations

Inflation necessitates liquidity, but deflation requires keeping money safe. While that’s a tricky balance to strike, whole life policies ensure holders can do just that.

Interest and dividends allow whole life policies to earn cash. This is liquid capital, meaning it’s usable whenever necessary. But even when the holder borrows from the value, it grows, making every dollar work doubly hard to fight inflation during recessions.

On top of that, whole life coverage provides non-guaranteed earnings, depending on the insurance company’s performance. Policyholders are able to reap these rewards, and many insurers have paid consistent dividends to customers for almost 20 decades.

It’s evident that whole life insurance policies outpace inflation, giving beneficiaries increased security. In fact, they even grow faster than savings accounts, meaning they’re the perfect place to store finances.

Whole life policyholders are also offered bespoke tax advantages to keep even more wealth safe and balance inflations’ otherwise-devastating effects.

The Bottom Line

While whole life insurance is more expensive at the premium price level, it pays off in the end, ensuring holders have enough money to last their lifetime and beyond.