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Inflation and Your Insurance Coverage

When Carol and Josh Wallace 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. Well, that was then…and this is now.

Recently, as they contemplated retirement, the Wallaces reevaluated their insurance needs and were surprised to discover their insurance coverage is inadequate. How could this be? The answer is really quite simple—inflation.

Because inflation affects purchasing power, it may also affect life insurance needs. For couples like the Simpsons, 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:

Paying Off Your Mortgage. Until recently, it seemed that many people who bought houses lived in them for their entire lives. Today, Americans are increasingly mobile. Greater employment opportunities, along with dual incomes, have changed 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 anytime in the past. Does this trend minimize the reality of inflation and the rising costs of homeownership? Not at all. The fact is, 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.

Funding Future College Expenses. With many individuals retiring at younger ages, it is increasingly common to be nearing 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. The average cost of attending college has risen by 40-50% since 2000-2001, far outpacing inflation (The College Board, 2006). To combat rising college costs, factor inflation into your college savings plan. 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 coverage to reflect the anticipated future cost of higher education.

Maintaining Your Standard of Living. 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—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. By including inflation in your life insurance plan, you can help maintain your current lifestyle throughout your retirement years.

Future Projections

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 make a great deal of sense. Plan to set aside time at least once each year to help ensure that your life insurance program is keeping up with inflation. Your qualified insurance professional can help you determine the solutions that most appropriately fit your family’s needs.

Copyright © 2003 Liberty Publishing, Inc. All rights reserved.


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