When Cathy and John Barton purchased their life insurance policies 20 years ago, they thought they did things the right way. They assessed their insurance needs, taking into account their home mortgage, the projected college education costs of their children, and their living expenses.
Recently, however, as they contemplated retirement, the Bartons reevaluated their insurance needs and were surprised to discover their insurance coverage is inadequate. How could this be? The answer, in a word, is inflation.
Because inflation affects purchasing power, it may also affect life insurance needs. For couples like the Bartons, inflation means that life insurance coverage, adequate years ago, may now be insufficient. With this in mind, consider three of the more common uses for life insurance proceeds that may be affected by inflation.
Until recently, it seemed that many people who bought houses lived in them for their entire lives. Today, Americans are increasingly mobile. Changing job markets and dual incomes have altered the dynamics of family finances. In many cases, a family or retired couple can now afford to pay a mortgage on a lot more “house” than at any time in the past. Does this trend minimize the reality of inflation and the rising costs of homeownership? Not at all. The fact is that escalating real estate prices have translated into larger mortgage loans. Therefore, if you have recently upgraded your home, you may need to consider increasing your life insurance to help cover your new mortgage.
With many individuals retiring at younger ages, it may be common to bearing or in retirement while you still have children waiting to attend college. If so, you are probably concerned about the rising costs of higher education. For the 2007 academic year, tuition and fees were up close to six percent from the previous year at both private and public 4-year colleges and universities (The College Board, 2007).
To be prepared, factor inflation into your college savings strategies. Make sure you have a contingency plan in the form of adequate life insurance to help provide protection in the event of an untimely death. Review your plan periodically and consider increasing your life insurance coverage to reflect the anticipated future cost of higher education.
Over time, the costs associated with the normal expenses of everyday life, as well as the special pleasures most people look forward to in retirement, like traveling, visiting children and grandchildren, engaging in favorite hobbies and leisure time activities, are affected by inflation.
As a result, the lifestyle you hope to enjoy in retirement could be affected, too. By basing your life insurance coverage on yesterday’s income and cost of goods and services, you are potentially shortchanging your future standard of living and that of your spouse. Factoring inflation into your life insurance plan can help you maintain your current lifestyle throughout your retirement years
Determining current life insurance needs is one thing, but, figuring out how much coverage you`ll need in the future requires you to pay careful attention to inflation, and how it can affect your lifestyle. Regular reviews of your insurance coverage can be helpful. Plan to set aside some time at least once each year to help ensure your life insurance plan is keeping up with inflation.