Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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Reviewed by Leslie Kasperowicz
Former Farmers Insurance CSR

UPDATED: Oct 30, 2020

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Over time the pricing of goods and services in an economy will generally increase, this is known as inflation. Inflation is important because as it occurs it erodes the specific value of money and thus causes a drop in purchasing power per unit of currency.inflation protection

For example, if the rate of inflation in any one year is 5% it takes 5% more money at the end of the year to buy the same goods as it did at the start of the year. So if 25 Kg of potatoes were to cost $20 on the 1st of January and the rate of inflation was applied to them, by December 31st they would cost $21.

In the United States the general measure of inflation is the Consumer Price Index which tracks a basket of products and measures the average price increases over time to determine a general level of inflation. Inflation for individual items within the basket may be higher or lower than the index rate.

What is inflation protection?

Inflation protection is a clause in an insurance policy that protects the policyholder from the specific effects of inflation. This means that the insurer agrees to continue paying benefits specified under the policy but to increase them in line with general inflation.

From a policyholder’s perspective this means they can reasonably expect the benefits paid under a given policy to match the actual payments required of them over time.

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Why is inflation protection important?

Inflation protection is particularly important to a policyholder when they can reasonably expect some of the risks covered by the policy to result in long-term benefit payment.

For example in the case of health insurance or disability insurance, the risk covered by result in an open-ended or permanent treatment regime. If care were to continue over an extended period of years inflation would gradually erode the benefit and the policyholder would be forced to make up the difference from their own pocket – which in the case of long-term disability or sickness might eventually become impracticable or even impossible for the policyholder.

For this reason though the policyholder may need to pay a higher premium for inflation protection in their insurance contract, they may consider it wise to do so because in the event of a claim they will want to ensure their standard of care is not compromised in the long-term.

Additional Inflation Protection Definitions