Imagine purchasing a health insurance policy with a sum insured of ₹10 lakh, believing it will cover all your medical expenses. However, over time, as medical costs rise due to inflation, that ₹10 lakh may no longer suffice. This gradual decline in the real value of your coverage is a silent threat posed by inflation, often unnoticed until it’s too late.
Watch Out
Your sum insured stays fixed on paper while medical costs keep rising — the gap between what your policy covers and what treatments actually cost widens every year you don’t review it.
TL;DR
- Inflation’s Impact: Inflation decreases the purchasing power of your insurance coverage over time.
- Medical Inflation: Medical costs in India have been rising at approximately 14% annually, significantly outpacing general inflation rates.
- Underinsurance Risk: Without adjustments, your policy may not cover future medical expenses adequately.
- Proactive Measures: Opt for policies with built-in inflation protection or regularly review and increase your coverage.
Understanding Inflation’s Effect on Insurance Coverage
1. Decreased Purchasing Power
Inflation erodes the value of money, meaning the same amount of coverage will cover less over time. For instance, ₹10 lakh today may not be sufficient to cover the same medical expenses in the future due to rising costs. This is particularly concerning for long-term policies like health and life insurance.
Total individual life insurance death claims paid by the industry (₹ crore)
FY 2013-14
₹10,861
FY 2016-17
₹13,858
FY 2019-20
₹18,042
FY 2022-23
₹28,616
FY 2024-25
₹33,697
Source: IRDAI Annual Reports, FY 2013-14 through FY 2024-25
2. Medical Inflation Outpacing General Inflation
Medical inflation in India has been significantly higher than general inflation rates. For example, healthcare costs have been rising at an annual rate of 14%, compared to the general inflation rate of 1.55% as of July 2025. This disparity means that without adjustments, your insurance coverage may fall short of meeting future medical expenses.
Key Fact
India’s healthcare costs are rising at 14% annually, against a general inflation rate of 1.55% — your sum insured needs to grow faster than general inflation just to maintain its real value.
3. Increased Premiums Due to Rising Costs
As healthcare costs rise, insurance companies may increase premiums to maintain profitability. This can lead to higher out-of-pocket expenses for policyholders, potentially making insurance less affordable and leading to reduced coverage or even policy lapses.
4. Underinsurance Risk
Without periodic reviews and adjustments, there’s a risk of underinsurance. This occurs when the sum insured is insufficient to cover the increased costs of medical treatments, leading to financial strain during claims.
17.2%
Life insurance’s share of Indian household financial assets in 2023-24, down from a peak of 26.2% in 2009-10. Households are putting a smaller slice of their savings toward life cover even as the cost of adequate protection keeps rising.
RBI DATASource: RBI Handbook of Statistics on Indian Economy, Table on Household Financial Savings
Watch Out
Underinsurance doesn’t announce itself at renewal — it shows up when you’re in a hospital and your sum insured runs out before the bills do.
Real-Life Example: The Consequences of Inadequate Coverage
Consider the case of Mr. Sharma, who purchased a health insurance policy with a sum insured of ₹15 lakh in 2010. By 2025, due to medical inflation, the cost of treatments and hospital stays had risen significantly. When Mr. Sharma required surgery, his ₹15 lakh coverage was insufficient to cover the expenses, leading to financial hardship.
FAQs
How often should I review my insurance coverage?
It’s advisable to review your insurance coverage annually or whenever there’s a significant change in your health or financial situation.
Are there policies that adjust for inflation?
Yes, some insurance policies offer built-in inflation protection or allow for automatic increases in coverage to keep pace with inflation.
What are the consequences of underinsurance?
Underinsurance can lead to insufficient coverage during claims, resulting in out-of-pocket expenses and financial strain.
“Inflation is real and dangerous. A cover that looks adequate today will be laughably insufficient in fifteen years. I advise clients to buy adequate coverage today and review it every three to five years. Increasing cover as income grows is not optional; it is necessary for the protection to remain meaningful.”
— Jahnvi Gupta, IC-38 Insurance Advisor, Mumbai
Inflation is the silent risk your policy ignores
Inflation is an inevitable economic factor that can silently erode the value of your insurance coverage. By understanding its impact and taking proactive measures, such as opting for policies with inflation protection and regularly reviewing your coverage, you can ensure that your insurance continues to provide adequate protection against rising costs.
Related Reading
Disclaimer: This article is for informational purposes only and does not constitute insurance advice. Consult an IRDAI-registered insurance advisor for recommendations tailored to your specific financial situation and needs.
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Reviewed and Edited by
Andy Shatananda
Andy Shatananda is a Senior Account Director with over 13 years of experience in building brands through strategy, strong client partnerships, and outcome driven marketing. He specializes in translating complex business goals into clear, scalable digital solutions. At Quantent, he leads with a balance of commercial thinking and creative rigour, helping brands grow with clarity, consistency, and purpose.
