Inflation affects everyone and everything — including insurance companies. But just because you’re paying more for eggs and milk doesn’t mean you’ll be paying higher insurance premiums too. It is possible, but it’s more likely that your cash value will increase while your death benefit will lose buying power. We tell you exactly what you can expect in this article.
Inflation affects most Canadians. It affects all aspects of our lives. From furniture to electronics, prices are rising like never before.
Insurance is not immune to inflation. But it affects life insurance differently than, say, bread or gasoline. Policies are a complicated product. Just because the cost of everything else is going up doesn’t necessarily mean your policy will too.
This article will take a look at the potential impact of inflation on your insurance policy, if any. It also tells you more about some of the different types of inflation and some steps you can take to come out on top.
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Inflation is when goods and services get more expensive over time. For instance, you might have noticed the cost of staples like broccoli or T-shirts increasing in the past months.
We can also view inflation as a silent killer of our purchasing power — our dollar six months ago was able to purchase more than that same dollar today.
Although stable inflation over time is healthy for the economy, significant inflation over a short period can hurt businesses and put Canadians in a bind. Bread might cost 30% more than a year ago, but our salaries and retirement funds aren’t necessarily keeping the same pace.
Economists measure inflation through the value of the Consumer Price Index (CPI) — a basket of fixed Canadian goods and services. As these goods and services get more expensive, the CPI appreciates. This appreciation determines how much inflation is part of our economy. Statistics Canada usually shows this information as inflation rates for a given period of time.
The CPI has 8 categories: food, shelter, household expenses, clothing, transportation, health and personal care, recreation and education expenses, and drugs such as alcohol and tobacco.
How inflation comes about is usually blamed on demand-pull inflation and/or cost-push inflation.
Demand-pull inflationDemand can pull up prices when it outpaces supply. Because there is more demand than suppliers can fulfill at the current price, suppliers increase their prices until demand and supply are equal again.
The world is coming out of COVID-19, and many are spending the money they couldn’t spend during the lockdown. Canadians are now travelling more than in the past two years.
We’re also purchasing more goods and services because we’re going to dinners, parties, and social events again. This ultimately means more demand for clothes, salons, etc.
Cost-push inflation means companies need to raise prices because the cost of their inputs is going up. As a result, the increased costs are pushed to the end consumer, making it more expensive for us.
Global issues like the war in Ukraine and the lockdowns in China are causing cost-push inflation. As supplies for necessities like wheat or computer parts are short, their prices rise. Companies that need wheat to make pastries, or that need fuel, etc., pass these price increases to you so that they can maintain their profits.
Inflation also has an essential impact on interest rates. When there’s significant inflation, it causes central banks, like the Bank of Canada (BoC), to increase the overnight interest rate. This is the rate at which private banks and other lending institutions borrow from each other. Increasing this interest rate is one way to tamp down inflation.
When the BoC increases this rate, banks also increase their interest rates. This increased rate can mean a higher yield on investments like bonds, guaranteed investment certificates (GIC), or certain equities.
It also means people will save more money instead of spending it because deposits earn a higher return. Low consumer spending means lower demand, causing businesses to slow down or eliminate price increases. This is how increases in the overnight rate ultimately reduce inflation.
