Inflation hits a 30-year high! Worried about sufficient future coverage? Here’s how to buy insurance effectively to protect against inflation.

10 May 2022

This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. To the extent that any information or recommendations in this publication constitute financial advice, they do not take into account any person’s particular financial situation or goals. We strongly recommend readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Any client information and case studies contained in this publication have been shared with the express permission of the individual concerned. No person involved in this publication accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any advice, opinion, information, representation, or omission, whether negligent or otherwise, contained in this publication.

All New Zealanders must have felt it this year: the cost of food, daily necessities, petrol, water and electricity, etc. are constantly rising. The cost of living is rising and the contents of your wallets and mine are shrinking.

The latest data released by Statistics New Zealand in April this year shows that as of the first quarter of 2022 (January-March), New Zealand’s annual inflation rate had climbed to 6.9%. This is the highest inflation has been in New Zealand for over thirty years, since the 7.6% increase recorded for the second quarter of 1990 (April-June).1 And ANZ economists predict annual inflation could rise to 7.4 per cent by the second quarter of this year. 2

The high inflation rate means that prices have been and still are increasing. In short, money is becoming less and less valuable. According to the government’s official inflation calculator, what would have cost $10 thirty years ago, now costs $18.88. This means that for the same $10, the purchasing power has dropped by about 47% over the past 30 years. 3

Like the various other affected living expenses, insurance naturally cannot escape the impact of inflation. Many people worry about what will happen in 10, 20, 30 years to the insurance they buy now. Will it become worthless? How can I protect myself against inflation when buying insurance? If I want to buy insurance for my child, are there any cost-effective products that stay stable despite inflation?

Today, YG Financial Services is here to talk to you about insurance and inflation.

  1. Inflation rates are rising, do we still need to buy insurance?

In the current economy, rising inflation is widespread around the world. Inflation means rising prices and depreciating currencies. For example, when I bought critical illness insurance more than ten years ago, I might have thought that $50,000 was not a small amount at the time. Now, if I were in the unfortunate situation of getting a critical illness and only received this amount of compensation, I would think it was just a drop in the bucket.

So do we still need to buy insurance? The answer is: yes, it is necessary!

Reason 1: We cannot predict risk

If we had the ability to predict and know that each of us would be safe and healthy throughout our lives, we would not need any insurance at all. And the truth is, at all stages of life there are all kinds of risks. We can never predict when a risk will occur or determine its severity. There’s a Chinese saying about this – “You never know which one will come first; tomorrow or an accident”

Even if we forget to think about ourselves, we always worry about potential risks to our children. For example, it’s natural for parents to wish for their children to grow up safe and healthy – they want to protect their children from accidents, and do not want them to have health problems during their childhood. We do not know what the future will hold, but early planning is essential for mitigating risks.

Reason 2: The benefit of insurance far outweighs the cost.

Insurance provides a large benefit for a small fee, even if you take into consideration inflation and depreciation. But let’s take those out of the equation for a moment and look at the critical illness insurance of an insurance company in New Zealand as an example to illustrate the difference in cost and benefit:

Let’s take the scenario of the parents of an under-one-year-old girl buying critical illness insurance for their daughter. The coverage is $450,000, and she will be insured until the age of 70. The annual premium is $715.43. After 70 years, the sum of the premiums paid is about $50,000.

Or suppose parents buy critical illness insurance for a 12-year-old girl and the coverage is $450,000, with an annual premium of $769.97 until the age of 70. At the age of 70, the premiums paid total about $44,000.

If a 30-year-old non-smoking woman buys this critical illness insurance, and the coverage is $450,000, then the annual premium will be $2012.55 and she will be insured until the age of 70. When she reaches 70, the total amount paid will be about $80,000.

Seeing the premiums and coverage amount laid out like this, it can be seen that the insurance policy provides a large fund for valid claims, and costs comparatively little in premiums. In order to provide a more detailed and clear understanding of the relationship between the premiums and the insurance cover, YG Financial Services have prepared the following table for you:

Of course, some people end up making a claim just a few years after buying insurance, and receiving the payment early. There’s no need to consider the impact of decades of inflation in this case at all then, as the risk is removed.

Reason 3: Future inflation may not be as severe as it has been recently

To measure the inflation rate, the CPI (Consumer Price Index) is used. The figure below is New Zealand’s CPI index map over the past 32 years.

Image source:

By looking at the above graph, we can see that since 2000 the average CPI (Consumer Price Index) inflation in New Zealand has been about 2.15%. That compares with an average of 2.4% in the 1990s, 4 and more than 11% in the two decades prior to that. 5

Since September 2002, New Zealand’s inflation target has been to keep inflation in the range of 1-3% on average over the medium term.4 Therefore, we can optimistically estimate that the future average inflation rate should remain between the New Zealand Federal Reserve Bank’s target range, and the insured amount will not depreciate too seriously.

  1. How can I buy insurance in a way that protects against inflation?

If you’re still worried that your insurance coverage will not be enough in a few decades, how should you buy insurance to protect against inflation?

YG Financial Services have put together this video to explain your options:

Interested in the critical illness insurance mentioned in this article?

Have questions about Fixed Premiums, or premiums and inflation?

Still not sure how to choose an insurance product?

Want to learn more about insurance and inflation?

Don’t hesitate, come and chat with YG Financial Services!






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