Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Life Insurance Payout
Transcript
- Lucas: So, Luna, quick question for you. When was the last time you looked at the face value of your life insurance policy? I mean really looked at it — not just the number in the policy document, but what that number would actually buy today. Luna: Honestly? I think I glanced at it maybe three years ago when I got the policy. But I haven't thought about whether the payout keeps up with inflation. That's a bit uncomfortable to admit. Lucas: It's extremely common. Most people buy a life insurance policy — term or whole life — and then they just let it sit. They assume that five hundred thousand dollars is five hundred thousand dollars. But in real terms, it's not. Luna: Right, because inflation eats away at the purchasing power every year. So that half-million you bought in 2020 doesn't feel like half a million in 2026. Lucas: Exactly. And the data backs that up. The most recent CPI reading we have is 334 as of May 2026 — that's up from about 310 in early 2020. So roughly 7.7% cumulative inflation over that period. But that's the headline number. If you look at categories that matter for a family — health care, education, housing — the erosion is even steeper. Luna: So if you bought a $500,000 term policy back then, in today's dollars it's worth more like... what, $465,000? Something like that? Lucas: You're in the ballpark. Using the CPI, it's about $464,000. But if you use a more realistic personal inflation rate — say, the kind a young family faces — it could be closer to $440,000 or even $430,000. That's a real gap. And the thing is, most people never adjust their coverage. Luna: And we should say, this episode isn't sponsored by any insurance company. In fact, we don't run ads at all on this podcast. That's something we're proud of — our listeners support the show directly. If that's something you value, you can find us at buy me a coffee dot com slash fexingo. But back to the insurance question. Lucas: So, the Fed funds rate is currently at 3.63% — the central bank has been holding steady at that level since last June. That means if you're buying a new policy today, the insurers are earning more on their bond portfolios than they were in 2021 when rates were near zero. In theory, that should be pushing premiums down. But in practice, many insurers have raised premiums because of higher claims costs and economic uncertainty. Luna: So you're saying that even though the interest rate environment is better for insurers, we as consumers aren't necessarily seeing the benefit? Lucas: Right. And that's why you need to be proactive. If you've had the same policy for more than five years, it's worth running the numbers. Let's paint a concrete picture. Say you're a 40-year-old non-smoker and you bought a 20-year term policy for $500,000 back in 2018. Your premium was probably around $300 to $400 a year. That was great coverage then. But now, in mid-2026, that $500,000 has the purchasing power of about $440,000. If your family needs that money to replace your income for ten years, they're getting about $44,000 a year in today's dollars — which might not be enough if you're earning $80,000 or more. Luna: So what can someone do about it? You can't just call up your insurer and say 'double my coverage' without going through underwriting again, right? Lucas: Yeah, you usually have to prove insurability again. But there are a couple of things to look for. First, check if your policy has an 'increasing benefit rider' — some term policies, especially ones tied to employer benefits, automatically increase the face value each year by a set percentage, often 2% or 3%. That's a direct inflation hedge. If you don't have it, see if you can add it. It'll cost a little more, but it's usually cheaper than buying a separate new policy. Luna: What about the 'guaranteed insurability' option? I remember seeing that term when I bought my policy. Lucas: That's a good one. Guaranteed insurability riders let you buy additional coverage at specific life events — marriage, birth of a child, or sometimes just on policy anniversaries — without going through medical underwriting. So if you have that rider, you can increase your death benefit to keep pace with inflation. The catch is, you pay for that additional coverage at your current age's rates, which get more expensive as you get older. But it's still easier than applying for a new policy from scratch. Luna: And if you don't have any of those riders? What's the best move? Lucas: Then you're looking at either layering on a new policy or replacing the old one. Layering means you keep your existing policy and buy a smaller, shorter-term policy on top. For example, you might keep the $500,000 policy from 2018, and then buy a $100,000, 10-year term policy to cover the inflation gap. That second policy would be cheap because it's smaller and shorter. You could even ladder them — a 10-year, a 15-year, a 20-year — to match your coverage needs over time. Luna: That's smart. But what about whole life or universal life? Those policies have a cash value component — does that help with inflation? Lucas: It can, but it's complicated. Whole life policies from mutual insurers often pay dividends, and those dividends can be used to buy paid-up additions, which increase the death benefit. Over time, that can help offset inflation. But whole life is expensive — you're paying maybe 10 times what you'd pay for term insurance. And the dividend growth might not keep up with inflation. In 2025, for instance, many large mutual insurers paid dividends in the range of 4% to 5.5% on their whole life policies. That's decent, but if inflation is running at 3% to 4%, your real gain is only 1% to 1.5%. Not a robust hedge. Luna: So the takeaway for our listeners: if you haven't reviewed your life insurance in the last three years, now is the time. Especially with inflation where it is. Lucas: I'd go further. Pull out your policy declaration page today. Look at the face amount. Then go to the Bureau of Labor Statistics website and plug that 2020 dollar amount into any CPI inflation calculator. You'll probably be surprised. And then call your agent and ask two questions: one, does my policy have any automatic inflation protection? And two, can I add a rider or buy additional coverage without new underwriting? Luna: And if the answer is no to both, it might be time to shop around. Term insurance is incredibly competitive right now — you can get a 20-year, $500,000 policy for a 40-year-old for under $400 a year from top-rated companies. So there's no excuse to leave a gap. Lucas: One final thought. If you're relying on employer-provided life insurance — usually one or two times your salary — that's almost certainly not enough when you factor in inflation. Group term policies often don't have inflation riders, and they can be cancelled if you leave your job. So that coverage is even more vulnerable. Consider a personal policy as the foundation, and use the group coverage as a supplement. Luna: Good point. Alright, Lucas, I'm going to dig up my policy and do the calculation tonight. Lucas: Do it. And let us know what you find. That's all for this episode of Inflation and Your Money with Fexingo. We'll be back with another angle soon.