Merriam-Webster defines inflation as the continuing rise in prices, usually caused by an increasing volume of money in the economy. In other words, over time your money just doesn’t stretch as far. Right now, many people are painfully aware of gas and grocery prices. Even if this current “squeeze” is temporary, over time the prices creep up. For example. in the 1950s a gallon of gas or a loaf of bread cost under a dollar. Now, you just can’t expect a dollar to buy as much.
And unfortunately, inflation isn’t something that we have much control over. It can truly be considered an inevitable part of the economic cycle. As such, helping clients to find assets that help “inflation-proof” money can be a major boon. At least, to the extent that inflation-proofing is possible. Because really, it just means having more money. While a regular bank account can’t really outpace inflation at 1% rates, there are two assets that do a spectacular job: real estate and cash value life insurance.
Can Mortgages Improve with Inflation?
Using the Truth Concepts financial calculators, it’s actually possible to prove numerically how a 30-year mortgage can benefit homeowners from a savings standpoint. However, that’s not the only reason to choose a 30-year mortgage when you buy a home. If inflation-proof savings are the goal, the secret benefit of mortgages is in the level payments.
Level payments mean that the mortgage stays the same over time. The face value benefit of this is that the mortgage cannot get more expensive. Yet in terms of inflation, it also means that over time it is going to feel less expensive.
Think about the cost of a $250,000 mortgage in the current real estate market. At a 3% interest rate, a 30-year mortgage may cost $1,054 and change each month. The 15-year mortgage is going to cost $1,726 and change. Note: All calculations shown below are accomplished using Truth Concepts version 3. 00.0.05.
Over time, it’s pretty likely that home prices are going to trend upwards (excluding a market reset). A $1,054 payment now might feel uncomfortable for some, yet in 30 years, it’s going to feel like a lot less. In fact, it’s going to have the same impact as $429 if prices inflate at about 3%. (Though inflation rates fluctuate, 3% is about average.)
Explaining “Present Value”
The reason we can identify this future impact is thanks to the Present Value calculator in Truth Concepts. We can choose Present Value, because we’re visualizing the $1,054 payment as a value in the future (Future Value), 30 years from now.
Or, in other words, we’re using the calculator to imagine what the level payment will feel like in today’s dollars, 30 years out in the future. Just add the approximate interest rate–we’re using 3%–-and the time frame of 360 months (30 years). Then, you can see for yourself how inflation will impact this mortgage payment.
For comparison’s sake, you can do this with the 15-year mortgage as well. And at the end of 15 years you can see that $1,426 is going to fele like $1,101. So there is a significant difference in the 15-year gap. In other words, if your client intends to live in their home for a long time, the longer mortgage is going to improve costs significantly.
Banks Lose Value on 30-Year Mortgages
So why would banks encourage 15-year mortgages by offering a lower interest rate, when they would make more money on 30 years of interest payments? Inflation is one distinct reason. The faster banks can get their money back, the greater the impact of those dollars. Otherwise, they’re going to be getting a thousand dollars with the power of about four hundred dollars.
Banks actively encourage a 15-year mortgage because it’s better for THEM, not because it’s better for the homebuyer. The faster banks get their money back, the more buying power they get for that money. The cumulative interest they make on the 30-year mortgage is just a fun fact. Keeping a home with a payment that decreases in impact is most likely going to be to the benefit of your clients.
The Impact of Inflation on Life Insurance
So what else has a level payment? Life insurance—specifically whole life insurance. Over time, the premiums that your client makes are going to feel like less and less. (And, on the flip side, cash value grows at a rate that tends to keep up with inflation.)
A $5,000 premium, for example, paid over 99 years, is going to feel like $267.97. That’s a pretty significant impact. You, or your client, may be thinking—what about the impact of inflation on the Cash Value and Death Benefit? And while this is true, whole life insurance is also designed to keep up with inflation. It may even outpace inflation.
Historically, life insurance policies have a much better track record of keeping up with inflation than a typical savings account. In addition, insurance companies have a good track record of paying dividends–even in low-interest-rate environments, wars, recessions, and more. Life insurance also has greater certainty than assets correlated to the stock market. In short, life insurance has certainty, staying power, and inflation benefits beyond a level premium. It’s a great foundational asset that can give your clients more certainty and thus help other assets perform better.
Learn More with the PEA Membership
If you’d like to learn and benefit from the combined experience of advisors in the industry, we’d encourage you to join the PEA membership program. There are three levels of increasing value that can help you on your journey and support you in the Prosperity Economics Movement. If you’re unsure about the right placement for you, you can sign up to chat with our PEM Caregiver, Janet Sims at firstname.lastname@example.org.