Life insurance premiums and the Consumer Price Index: why cover erodes over time
A sum assured fixed at 35 buys a lot less in real terms by 55. Here is why level cover erodes, and what to check so your policy still matches your family's needs.
A RM500,000 term policy bought at 30 sounds like a fixed, dependable number. It is fixed in ringgit terms, but not in what it can actually buy by the time a family might need to claim on it. Prices rise every year, and a sum assured set once and left untouched quietly loses purchasing power for as long as the policy runs. This is worth understanding before you buy cover, and worth revisiting periodically after you do.
What "erosion" actually means here
A level sum assured is a fixed number written into the policy. Living costs, medical bills and the general price of goods and services are not fixed; they tend to rise year on year. So the same RM500,000 that would have replaced ten years of a breadwinner's income when the policy was bought might, a decade or two later, cover meaningfully less of that same need, simply because everything else has become more expensive in the meantime. Nothing has gone wrong with the policy; it pays exactly what it was designed to pay, but the value of that fixed amount relative to the cost of living has moved.
Medical and hospitalisation costs are a particular concern, since they tend to rise faster than general prices. The insurance and takaful industry's own Medical Cost Containment Task Force has studied the drivers of medical costs and medical insurance premium inflation in Malaysia, precisely because rising treatment costs feed into higher premiums, and by extension into a wider gap between what a policy bought years ago was meant to cover and what it can cover today.
The protection gap this creates
LIAM's Protection Gap Study, conducted with Universiti Kebangsaan Malaysia, found that Malaysian households are substantially underinsured relative to what a family would need if its breadwinner died or became unable to work. Averaged across families with two adults and three children, the study found a protection gap of about RM553,000 for households where the breadwinner had both life and medical cover, rising to about RM642,000 with life cover only, and to roughly RM723,000 with neither. These are averages from a study conducted some years ago rather than a live figure, so treat them as an illustration of scale rather than today's exact number; the direction is the relevant point, since a protection gap that was already large tends to widen further as costs rise and the sum assured stays fixed.
Why this happens even on a well-chosen policy
- The sum assured is set once, typically at the point of purchase, based on income replacement, debts and dependants' needs at that time. Those needs usually grow: a mortgage may increase, children reach school and then university age, and daily living costs rise.
- Bonuses on a participating policy are not guaranteed. If your plan is a with-profits (participating) policy, any reversionary bonus or dividend that increases the death benefit over time depends on the performance of the insurer's life fund and is explicitly not promised. A poor run of fund performance means little or no bonus is added, and the sum assured effectively stands still while costs keep moving.
- A non-participating policy has no built-in adjustment at all. A level term or non-par whole life policy pays exactly the sum assured stated in the contract, with no mechanism to keep pace with rising prices unless you take deliberate action to increase it.
What to do about it
- Review coverage periodically, not just at purchase. A sum assured that matched your needs at 30 with a young family and a large mortgage may not match those needs a decade later.
- Consider an increasing term option if your insurer offers one. Some term plans let you step up the sum assured at set intervals or life events, usually with limited underwriting, at the cost of a higher premium.
- Treat critical illness and medical cover as needing separate reviews. Medical cost inflation has historically run ahead of general price inflation, so a medical card or critical illness sum insured is worth checking more frequently than a death benefit.
- Don't assume a participating policy's bonuses will offset the gap. Ask for the guaranteed portion of the death benefit versus the illustrated portion, and plan around the guaranteed figure.
- Factor in EPF and other savings, but don't rely on them alone. Retirement savings in EPF are meant for retirement income, not necessarily sized for an income-replacement shortfall if a breadwinner dies early.
A practical starting point
Rather than guessing at whether your cover is still adequate, work from the numbers that matter: current income, outstanding debts, dependants' ages and years of support needed, and today's cost of the milestones you are protecting against, such as remaining mortgage years or children's education. Compare that total against your current sum assured. Our coverage gap check walks through this, and comparing plans shows what a top-up or new policy would cost at today's rates.
Talk to an advisor
Deciding whether to top up an existing policy, add a rider, or restructure your cover entirely depends on your specific numbers and how your family's needs have shifted since you first bought cover. A licensed advisor can run this review with you and show what each option would cost today. Use our advisor directory to find one, or ask our assistant if you want a first look at whether your current sum assured still fits.
Sources
This content is educational information from a licensed advisor, not financial advice. Product details vary by insurer — verify specifics with an advisor.
