Insurance cover and inflation

Recently I had an interesting discussion with a colleague of mine.

His stance was: As time passes you need higher insurance cover.

While my stance was: As time passes you need lesser insurance cover.

Even after a lot of brainstorming and even exchanging excel files, we both think we are right. Hence I decided to publish the gist of the debate.

My logic: Your ideal insurance cover is the net present value of the all the expenses your family (sans you) would incur in the foreseen future. (Say next 70 years) One should deduct the wealth one already owns/would inherit and the future income from your spouse’s occupation/business. By this logic, every extra year you live and provide for the family this value would decrease (because now only the next 69 years have to be accounted for). Also you would save some capital and build some assets for the rainy day which would again reduce the value of the cover required.

So effectively one would require a very high insurance cover at the beginning of family life which would taper down gradually to zero by the retirement year.

His stance: Lifestyle is downward sticky. As your income and wealth grows, so does one’s standard of living. A refrigerator might be a luxury for the middle class 20 years ago, but now a bare necessity. So the luxuries and habits of individuals tend to move up as time elapses and it is very hard for someone to go back to the age old Spartan days.

This compounded by inflation results in rupee losing nine tenth of its value every 20 years results in one needing to increase the insurance cover each year. Simply said there is never enough of money and people would even find ways to spend kuber ka khajana (with a sly reference to the recent treasure found in a Kerela temple)