Recently, the Baxters reevaluated their insurance needs and were surprised to discover their insurance coverage was inadequate. How could this be? The answer is really quite simple – inflation.
Because inflation affects future purchasing power, it also affects future life insurance needs. For couples like the Baxters, inflation means that life insurance coverage that may have been adequate several years ago may no longer be sufficient. With this in mind, consider three of the more common life insurance needs that may be affected by inflation:
Purchasing a new home with a mortgage. Until recently, it seemed that many people who bought houses lived in them forever. Today, Americans are increasingly mobile. Greater employment opportunities, along with dual incomes, have changed the dynamics of family finances. In many cases, a growing family may now be able to 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 purchased a home, you may need to consider increasing your life insurance to help cover your new mortgage.
College education costs. If you are planning on sending your children to college, you are probably concerned about the rising costs of higher education. And, rightfully so! The average cost of attending college has risen by 7.76% annually over the last 20 years, 1.8 times higher than the Consumer Price Index during this period (Journal of Financial Planning, February, 2001). To combat rising college costs, factor inflation into your college savings plan. Make sure you have a contingency plan in place in the form of adequate life insurance to help provide protection in the event of an untimely death and consider increasing your coverage so that it best reflects the future cost of education.
Everyday expenses. Shopping at the grocery store – pizza on Friday nights – taking your children to the movies – filling up your gas tank – replacing the roof on your house. Over the course of time, the costs associated with these necessities and “treats” of everyday life are affected by inflation. As a result, your family’s future lifestyle could be affected, too. By basing your life insurance needs on your current income and today’s cost of goods and services, you are potentially shortchanging your family’s future. Be sure to include inflation in your life insurance plan to help maintain your family’s current lifestyle.
Determining your 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 ensure that your life insurance program is keeping up with inflation and do so with your financial services professional. He or she can help you determine what solutions most appropriately fit your – and your family’s – needs.