Rising prices have been a challenge for Americans since the founding of this nation. The average inflation rate since 1960 has been 3.8% per year. That means prices have steadily increased, including your life insurance policy.
Contrary to what many consumers believe, the insurance industry is not responsible for the recent increases in premium prices. Inflation is. Costs are rising in all sectors. That includes housing materials, labor, electronics, and auto repairs. Increased demand and limited supply have caused prices for these materials and services to go up significantly.
How higher prices affect life insurance rates
Life insurance is not created in a factory or shipped via highway or rail, but the rising costs of those processes in other industries affect life insurance premiums. Insurance companies can pay out death benefits because they invest the money you pay in premiums. Inflation causes the price of those investments to go up and increased premiums are a reciprocal effect.
An excellent example of this is real estate holdings. Most insurance companies invest heavily in real estate. Inflation raises the cost of making and maintaining those investments. They need to adjust their premiums to compensate for that additional cost. Policyholders, who are also dealing with rising prices need to reassess how much life insurance they need.
Using the CPI to predict insurance rates
The consumer price index (CPI) is the metric used by the US Bureau of Labor Statistics (BLS) to measure inflation. Three of the largest components of that measurement are housing prices, transportation expenses, and food costs and each of these can affect insurance premiums.
- Housing prices: Paying more for a home means the owner needs to carry more insurance on that home. Real estate values go up with inflation.
- Transportation expenses: We’ve already covered how cars are now more expensive. The cost of transporting those cars and parts to repair them has also increased.
- Food costs: This directly affects the labor market. Higher food costs and more expensive living expenses mean that workers need to make more money.
Auto insurance is included in the transportation component of the CPI calculation. Life insurance is not because it’s considered an investment, not an expense. The connection between CPI and life insurance is that higher prices equate to a higher cost of living. Consumers may need to recalculate their life insurance needs to adjust for that.
The Federal Reserve Bank’s efforts to combat inflation
We can’t talk about inflation without evaluating the efforts of the Federal Reserve Bank (Fed) to get it under control. Their strategy has been to steadily raise interest rates in the hopes that consumer spending will decline. That lowers demand and allows the supply side to catch up. It works in theory, but the results haven’t trickled down to consumers yet.
Insurance premiums may eventually come down again when the Fed lowers inflation to its target rate of 2% per year. That doesn’t mean those premiums will go back to the low rates of yesteryear. Inflation will always be with us in some form. Speak with your insurance agent about ensuring your life insurance coverage accounts for it.
Sources:
https://www.libertymutual.com/insurance-resources/property/how-does-inflation-affect-insurance-rates
https://www.worlddata.info/america/usa/inflation-rates.php
https://www.bls.gov/cpi/factsheets/common-misconceptions-about-cpi.htm
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