Inflation and your death benefit

How to use it

1. Enter the death benefit of the policy you are looking at.
2. Enter an inflation rate per year. This is your assumption, and the tool suggests trying 2%, 3% and 4%.
3. Enter the number of years from now you want to look at, such as the end of a 20-year term.

The large figure is the policy's buying power at that date in today's dollars, together with the face amount you would need then to match today's value. A bar chart shows the buying power every five years.

How the math works

The tool uses compound growth in prices:

• Buying power in today's dollars = death benefit ÷ (1 + inflation rate) raised to the number of years.
• Coverage needed to keep pace = death benefit × (1 + inflation rate) raised to the number of years.

Both figures are rounded to the nearest $1,000. The chart repeats the first formula for years 5, 10, 15 and so on up to the year you entered.

Hypothetical example: a $500,000 level death benefit and 20 years. At 3% inflation the benefit is worth about $277,000 in today's dollars, and about $903,000 would be needed in 20 years to match $500,000 today. At 2% the benefit is worth about $336,000 in today's dollars, and at 4% about $228,000. The rates are illustrations, not forecasts.

What it assumes

• Inflation is a steady rate for every year. The tool uses no price index and no forecast, so choose the rate yourself.
• The death benefit stays level. The tool does not model a policy whose benefit rises, such as an increasing death benefit option on a universal life policy.
• The result describes a single date. It does not track the premiums you pay or what you could do with them.

Where it stops being right

• Not every need rises with prices. The tool points out that a fixed mortgage balance does not grow with inflation at all. A mortgage payoff may need no adjustment, while income replacement and college costs often do.
• The tool shows the loss in buying power but does not weigh how much coverage you need later. Your needs often fall as debts shrink and children grow up, so the shrinking benefit may matter less than the chart suggests.
• It is no substitute for a fresh needs review when your income, family or debts change. The tool lists three ways to handle inflation: buying a little more coverage than today's need, laddering policies, and reviewing coverage every few years.

The inflation and life insurance: is your coverage shrinking guide discusses how inflation affects policies. A laddering term life policies to match your needs can be built with the term life ladder builder, and the how to review your life insurance policy every year guide describes a regular check-up. To size the coverage in the first place, use the How much life insurance do I need?.