Inflation is the rise in prices over time, which means the same dollar buys less each year. At 3% a year, $50,000 in 20 years buys what about $27,700 buys today. Nothing happened to the balance. The price of everything else moved.

A savings account that pays 1% makes the gap visible. Over the same 20 years the balance grows from $50,000 to about $61,000. The 3% inflation shrinks what that $61,000 buys to about $33,800 at today's prices. The balance went up and the buying power went down. The interest is also taxed each year, which pulls the real return lower still. These rates are examples, not predictions, and a savings account can pay more or less than 1% in any given year.

A viewer asked whether life insurance is a hedge against inflation. A hedge is something that holds its buying power when prices rise. I said yes, and it's one reason I like a policy as a place for emergency money and big planned purchases instead of a checking or savings account. Checking pays hardly anything. If prices rise faster than the interest, your money loses value. The hedge question was part of a Q&A about exiting an IUL over 60 and whether life insurance hedges against inflation.

A whole life policy with a 4% guarantee, even after expenses, is likely to beat 3% inflation over a long stretch. Likely isn't certain, and the early years run behind because the expenses come out first. A 4% guarantee was common on older policies. Newer ones guarantee less, so check the number in yours. Dividends on top of the guarantee aren't promised.

I've also thought about what happens if prices run away. In that case I could borrow against the policy, buy something that tends to rise with prices, let it grow, sell it, pay off the loan, and keep what's left. That's a plan and not a promise. Assets can fall in value too, the loan interest keeps running while you hold them, and a loan reduces the cash value and death benefit while it's outstanding.

Take the money you'd call your emergency fund and ask what it will buy in 20 years if it earns what it earns now, minus tax and inflation.