Inflation’s Impact on Insurance

At any point in 2024 did you find yourself shaking your head in disapproval with the prices of your staple goods at your local grocery store? How about having an audible gasp as you saw the sticker price on bigger ticket items like a new vehicle or a weeklong vacation? It would be hard to reflect on your finances in 2024 without acknowledging the influence inflation likely had on your budget. But have you considered the impact inflation had on your insurance coverage? An annual insurance review should be a critical piece of comprehensive financial planning. Inflation’s recent impact may warrant spending extra time reviewing your insurance coverage for the year.

Inflation is not always about the rising costs of goods and services. Wage inflation was heavily prevalent in the last few years as employers needed to attract or retain employees with higher salaries and bonuses. This increase in income may have helped soften the blow for rising costs. But how prepared is your family for an unexpected loss of life from a contributing wage earner? Projected future earnings is a critical piece of determining your family’s life insurance needs.

When it comes to insurance coverages like disability and health insurance, inflation may already be factored into the cost adjustment. Most disability policies typically pay 60%-70% of your current income. For health insurance, policies generally build in inflation protection in the form of an out-of-pocket max. However, your emergency fund deserves a second look to offer protection for certain costs associated with these insurances. Your disability insurance policy will likely have an elimination period¹ which is the amount of time that must pass until your insurance benefits will start paying out. As costs increase, a healthy emergency fund is critical to ensure you can meet both your out-of-pocket maximum² for medical insurance and non-discretionary costs during your elimination period for disability insurance.

The standard for most homeowners’ insurance policies is to replace your personal property (coverage C)³ on an actual cash value basis. Although you will still receive a payout, you may be disappointed at the amount you cover for the cost of replacing the lost or damaged goods. Consider adding a replacement cost endorsement onto your coverage C homeowners policy to help protect yourself from inflation’s impact on the cost of new personal property items. Fortunately, your dwelling coverage (Coverage A)³ should already be covered under a replacement cost basis as the standard for most policies. One item to review on the dwelling coverage is your insurance provider’s coinsurance requirement. Generally, most policies will require you to insure at least 80% or more of the value of your home to avoid a coinsurance penalty on claims. As home values rose in the last few years, consider double checking your coinsurance requirement is being met with your insurance provider.

Lastly, your auto liability coverage may need revamping due to rising costs. According to the Journal of Consumer Research, non-lethal auto accidents cost an average of $162,000 while the average cost of an auto fatality was $1.869 million.⁴ Most state mandated minimum auto insurance coverage amounts would fail to fully cover the average cost of an auto accident. Furthermore, a $1 million umbrella insurance policy may also lack appropriate coverage for more serious accidents. Consider increasing your liability coverage ensuring you are protecting your accumulated wealth and accounting for these rising costs.

Inflation continues to play a role in your financial planning. You may already be factoring in a cost-of-living adjustment accounting for general rising costs over the long term. To fully consider all of inflation’s impact on your planning, get in the habit of reviewing your insurance coverage on an annual basis. If you feel you may be under insured, consider speaking with your Financial Advisor who can help you identify proper coverage amounts for your personal needs.

Resources:

1. Elimination Periods in Disability Insurance: How They Work
2. Out-of-Pocket Maximum: What It Is & How It Works
3. Understanding Home Insurance Coverage A, B, C, D, E & F
4. Car Accidents Statistics 2024 | ConsumerAffairs®

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