Index Linked Increasing Life Assurance Policy - A Hedge Against Inflation

Inflation is what happens when the price levels of goods and services go up over time. It's a simple concept that has to be dealt with by anyone who makes a long term investment. That's because if you don't you risk the potential that inflation can have devastating effects on your life in the years to come.

When prices rise, your specific unit of currency can buy fewer and fewer goods. Your purchasing power erodes. Real value dwindles.
With this in mind, you must consider the effects of inflation when you buy insurance. Insurance is one of the things that you buy that you hope you never have to use. When a young person purchases life insurance he or she hopes that their beneficiaries won't be able to receive anything for at least fifty years or more.

They purchase coverage based on their perception of what the cost of living will be many years down the line. And, if they live a full life, often the bad news is that their cover is not enough to take care of the costs the way they anticipated. That's because inflation has eroded the purchasing power of their currency.

For example, fifty years ago a loaf of bread cost about twenty five cents. Today a loaf of bread cost more than six dollars. The cost has gone up about 2,400%. Another way of looking at it is that today's dollar, in terms of bread, is worth about 1/24 of what it was half a century ago.

What does this have to do with life insurance? Well, if your family's annual expenses in the mid twentieth century were about $15,000 per year and you followed the general rule of thumb of buying at least six times to seven times your annual expenses, you probably bought a life insurance policy for somewhere in the neighborhood of $100,000 in coverage.

How long will $100,000 last today? Certainly not six or seven years - unless you want your family to eat cat food.

What Can You Do to Protect Yourself If You're Buying Life Insurance Today?

Insurance companies now offer an increasing life assurance product that protects your term life assurance policy from the effects of inflation. It's called index linked life assurance and the way it works is that each year you will have the option of increasing the amount of your coverage in order to keep it in line with the retail price index. The great thing is that you will not need any additional medical examinations from one year to the next.

Index linked life insurance will then retain its real value as far as purchasing power is concerned. In other words, if you purchase six times your annual expenses today and keep current with the retail price index, your family will receive six times their annual expenses in benefits upon your demise.

So, even if a loaf of bread cost $144 in fifty years (imagine that), your beneficiaries will have the money they need to continue living in the style to which you have spent your life making them accustomed.