Inflation reduces the dollar’s value each year, causing prices to rise. Unfortunately, at the same time, it makes your life insurance death benefit worth a little less each year. This can leave loved ones with less financial security to replace your income and pay off debts if you pass away early. Fortunately, many life insurers offer inflation riders to protect against inflation. You can add these as supplements to your policy to guard your death benefit against inflation. This article will explain how inflation riders work and dive into a few of their benefits.
How do inflation riders work?
Inflation riders are life insurance riders that increase your total death benefit by a fixed percentage — such as 25% — through incremental increases each year for a set number of years. In exchange, you pay higher premiums. However, the slight increase in premiums is often well worth the buying power your death benefit will retain.
Benefits of an inflation rider
Inflation riders offer several benefits to policyholders:
1. Protect your death benefit against inflation
An inflation rider’s main benefit is protection against inflation. This ensures that your loved ones receive the same or similar value from your death benefit if inflation is running hot. The inflation rider is especially beneficial if you don’t pass away for a long time. Without it, your death benefit could be at risk of losing substantial value.
2. Provide a bigger death benefit payout to your loved ones
Safeguarding against inflation isn’t the only benefit of an inflation rider. If the inflation rate is low, getting an inflation rider could help you grow your death benefit, providing your loved ones with a larger payout if you pass away while the policy is active. This can be helpful on term and whole life insurance since these policies typically don’t let you adjust your death benefit once you take out the policy.
3. Inflation reduces the value of your fixed premiums
Inflation works both ways. If you pay the same dollar amount in premiums every year, the actual value of each payment decreases thanks to inflation. For example, imagine paying $5,000 per year for a whole life insurance policy with an inflation rider. Inflation makes that $5,000 payment worth less each year, yet you still pay the same amount. For instance, by year 20 of the policy, that $5,000 would be worth far less than year 1. This makes an inflation rider even more inexpensive than it looks, especially since it helps your death benefit keep up with inflation.
Safeguard your life insurance policy against inflation
You don’t have to let inflation eat away at your death benefit. Getting an inflation rider can help your death benefit keep pace with inflation. It could help you grow faster than inflation when the inflation rate is low, providing more funds for your loved ones. Premiums are slightly higher, but you can save far more money. Plus, inflation makes your premium payments worth less each year, so costs almost even out. That said, shop for multiple life insurance quotes. Compare prices for coverage and inflation riders to get the best deal on the coverage you need.