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.

Life insurance provides policyholders with money for their beneficiaries in the event of their death. So, if they pass away, their heirs can claim on the policy and receive a financial cushion, typically providing them with more money than the deceased could give on their own.

But not all life insurance policies are the same. Significant differences between the two main types — whole and term — exist. One isn’t better than the other. It just depends on the living and financial situation of the policyholder.

Life insurance experts, like Domonique Rodgers of NC State, help individuals pick the perfect policy for themselves and their loved ones. But it doesn’t hurt to do independent research to establish the differences beforehand.

Whole Life Policies

Whole life insurance is permanent. In other words, they never expire, provided the policyholder keeps up with their premium payments. So essentially, they do exactly that — cover people for however long they live.

Within whole life policies, there’s also a cash value, which provides an additional source of funds for beneficiaries or tapping into for emergencies while the person is alive.

It’s the more stable option, as coverage never ends. However, the privilege comes at a price — whole life insurance plans tend to be more expensive than term life policies.

People pay more for whole life insurance early on, as the premiums remain stable throughout the policy’s duration (i.e., the holder’s entire life). However, as the person ages, the cost becomes cheaper than a typical term policy for older people.

On average, whole life insurance costs between five and 15 times more than term policies with equal death benefits. But many people appreciate the stability (and potential for withdrawals from the cash value).

Term Life Policies

Arguably, term life insurance is easier to understand than whole policies because it’s straightforward insurance without the cash value. Holders can’t withdraw money from the insurance early; it’s simply there to provide a death benefit for their heirs if they pass away.

Like other types of insurance, term life coverage is only valid for a pre-defined period. Typically, terms last between five and 30 years. Once the time is up, the policy expires.

These policies’ finite duration and simplicity make them much cheaper than whole life insurance. If people want a straightforward way to provide for their families when they die, they often choose term life coverage.

That said, the policyholder must pass away within the timeframe for the beneficiaries to receive a payout. If the person is still alive once the policy expires, they must take out a new plan. Because of their increased age, it will undoubtedly be more expensive than their previous coverage.

Most People Benefit from Life Insurance. But It’s Up to the Professionals and The Individual to Choose the Policy Type.

While both whole and term life insurance gives death benefits to heirs, whole life coverage tends to be more expensive. But many love the stability this increased cost provides.