I recently conversed with my friend Shailesh over a coffee about the rising petrol prices. “High consumer prices could seriously erode our wealth if we don’t act upon it,” I said.
He felt that the fear of inflation is exaggerated. “While consumer prices are up, improving income levels would make up for it,” he countered.
To make him understand the perils of inflation, I put forward the question, “what will you choose?
- Option 1 – Take a rupee now, which gets doubled every day for 30 days or
- Option 2 – Take Rs 5 cr now
“Rs 5 cr obviously, he said confidently. Unknowingly, he let go of the opportunity to earn Rs 48 cr more. One rupee that became Rs 2 on the second day and Rs 4 on the third day also became Rs 10.48 lakh on the 21st day, Rs 6.7 crore on the 27th day and about Rs 53 cr on the 30th day.
The analogy set him thinking and showed him the power of compounding. “If high compounding of investments could create immense wealth, so could the soaring inflation reduce my purchasing power”, he wondered.
Inflation has been affecting the wealth of individuals from time immemorial.
The big question is whether you are factoring its effects while evaluating insurance needs?
Let’s take the case of term cover.
The usual thumb rule is to buy a term cover to the extent of 10-12 times one’s annual income. The idea is that in case of the death of an earning family member, the family doesn’t suffer financially and compromise their goals and lifestyle.
Three critical goals for most families are a child’s higher education, house ownership, and retirement. A continuous decrease in purchasing power has made it necessary to consider the future value of money while deciding on the optimal term cover.
Take the case of higher education expenses in India. A degree in an IIT costs about Rs 10 lakh today, Rs 30 lakh for MBA in IIMs and Rs 50 lakh for a private medical degree.
IIM fees have been doubling every four years. So, have the medical degree costs moved up steeply, especially in private institutes. Assuming 10% inflation, after 15 years, you would need Rs 42 lakh to sponsor private engineering courses, Rs 2.1 crore to fund medical fees and Rs 1.1 crore for supporting MBA courses in India.
Property prices in popular metros have moved on an average at 8% or more every year. This increase, in turn, has led to mortgages coming to high multiples of one’s family income.
Once retired, and with improvements in lifestyle, you would likely spend on items that you never did in the past. This spending would increase your household budget. After all, smartphones were never part of our budget even a decade back.
What’s the solution?
First, estimate your life cover needs using the human life value indicator. Then, buy pure term life policies linked to various goals with the sum assured and tenure in line with the overall financial plan.
Finally, increase the cover when the need arises by resorting to top-ups. These can be periodic, depending on the impact of inflation on the goal and how close it is to realisation. Remember, inflation impacts far away goals much more than goals that are near term.
Besides education, even medical inflation is up. With the shortage of doctors and healthcare professionals, doctor fees and medical services are steadily increasing in the private sector. While advancements in medical technology have reduced time for medical procedures and saved many lives, it also comes at a steep cost for the patients—better hospital amenities, in turn, demand premium pricing.
What’s the solution?
Medical costs could quadruple over the next two decades if one assumes an inflation rate of 8%. For example, a surgery that costs Rs 4-5 lakh today could become Rs 20 lakh over the next two decades.
While a cover between Rs 5-10 lakh is adequate for a young family today, it needs to be regularly topped up to match the rise in health care costs.
Availing top-up with deductibles usually comes out cheaper.
In case of a deductible, you agree to pay a specific part of the claim in exchange for a lower premium.
Look beyond thumb rules and oft-quoted figures. Instead, realistically assess your insurance needs based on the new price realities and regularly top up to make up for the gap.