Inflation is something we’ve all become familiar with in recent years. Our money doesn’t seem to stretch as far as it used to, and everything from our grocery shop to household bills have soared in price.
Where we may not notice the effect of inflation as easily is in our life insurance policy. If you’re unsure how your own policy could be affected and what, if anything, you can do about it, this article is here to help clear things up.
What is inflation?
Inflation refers to the gradual increase in the cost of goods and services over time. This means your money has less buying power than it used to.
In Australia, inflation is usually measured using the Consumer Price Index (CPI), calculated by the Australian Bureau of Statistics. The CPI tracks changes in everyday expenses like food, housing, transport, and healthcare.
The Reserve Bank of Australia’s target for inflation is between 2-3% and has recently been above this range. However, this figure can go up or down depending on economic conditions.
How does inflation impact my policy?
Inflation can affect your life insurance in a few ways:
- Cover value: A fixed benefit amount might not go as far in the future as it does today
- Covering final expenses: Costs like funerals, medical bills, or any outstanding debts could increase in price over time
- Less support for your beneficiaries: The money you leave behind for your chosen beneficiaries may not cover as many expenses as it would today
For example, if you have a policy with a fixed benefit amount of $50,000, that amount stays the same over time. While your payout doesn’t change, inflation may reduce what it can cover in the future.
Some policies include an Automatic Benefit Amount Increase which allows the benefit amount to increase over time. This means the payout could be higher in the future than when the policy started, although increases are not guaranteed to keep pace with inflation.
It’s also worth noting that some policies, like Direct Cover, have age-based premiums where the cost of your cover will increase as you get older.
Overall, inflation and policy features can affect both the cost of your cover and what it may be able to provide over time.
Things to consider about inflation and life insurance
When you’re thinking about your life insurance policy and inflation, it can be helpful to consider the following:
- How long you expect to have your policy for
- What will the payout be needed for in the future (funeral costs, daily expenses, debts, etc.)
- Whether your policy lets you adjust your cover over time if your needs change. Keep in mind that if your health changes, it may not always be possible to increase your cover.
No matter what life insurance policy you started with, it can be useful to periodically review it to ensure that it still meets your needs.
Do I need to take out more cover?
There isn’t a right or wrong answer. Inflation may just be one of many factors that someone considers when deciding if their current level of cover suits their situation.
Instead of jumping to increase your cover, you could choose to:
- Review your cover regularly to check that it still works for you
- Reassess your expected costs
- Adjust your cover only if your circumstances change
It’s important to remember that adjusting your cover could also affect premiums, so carefully consider any changes before committing.
How much do funerals cost?
Funerals can vary significantly in cost depending on things like your location, if you choose a burial or a cremation, and any extras you include in the service like flowers or a reception.
According to Golden Insurance’s Funeral Report, when you add up the typical costs of all funeral elements, the total can be considerable. On average, a burial in Australia costs about $23,000, while a cremation can average $15,000.
These figures show how easily things add up when planning a service for your loved one. Funeral costs are often one of the main things people want to help cover with their life insurance policy, which is why considering your cover amount in the context of rising costs is important.
How can I increase my cover but keep the cost down?
Increasing your cover doesn’t always mean you have to spend a lot more.
Here are some things to consider if you’re thinking about adjusting your cover:
- Focus on the essentials: Review what you really need your policy to cover, like mortgage payments or funeral expenses, rather than adding extras that may not be necessary
- Compare policies: As your needs change, you may find that your current policy isn’t the best fit anymore. Comparing policies may help you understand what options are available
Balancing cover and cost is a personal decision that depends on your individual priorities.
Do life insurance policies go up with inflation?
This depends on the policy you have.
Some policies include an Automatic Benefit Amount (ABA) increase, which allows your coverage amount to increase over time. These increases are not guaranteed to keep pace with inflation and depend on the policy’s terms.
Separately, some policies have age-based premiums, where the cost of your cover generally rises as you get older. This is different from the ABA increase and reflects how premiums are structured rather than inflation adjustments.
Why choose Direct Cover Life Insurance?
While your life insurance policy might give you peace of mind today, understanding how rising costs could impact your cover can help you be better prepared for the future.
At Direct Cover, we aim to make life insurance straightforward, helping you find the cover that fits your needs with as little stress as possible
With our simple application process and a friendly team of professionals ready to answer any questions you might have, you could get some peace of mind with Direct Cover today.
Give us a call on 1800 583 675, Monday to Friday from 8am to 7pm (AEST/AEDT), excluding NSW public holidays.