When Cindy and Sean Baxter purchased their life insurance policies ten years ago, they based their coverage on their anticipated obligations and needs. They made policy decisions, taking into account the mortgage on their home, projected college education costs, and living expenses. Well, that was then . . . and this is now.
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, which 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.
Mortgage obligations. Until recently, it seemed that many people who bought their homes lived in them for most of their lives. Today, Americans are increasingly mobile. Changing employment opportunities, along with dual incomes, have altered 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 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, 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 escalating costs of higher education. And, rightfully so! For the 2003-04 academic year, tuition and fees were up 6% from last year at private four-year colleges, and increased 14.1% at public four-year colleges (The College Board, 2003). To be prepared, factor inflation into your college savings strategies. Make sure you have adequate life insurance to help provide financial protection in the event of an untimely death, and consider increasing your coverage so that it best reflects the future cost of education.
Daily expenses. Shopping at the grocery store. . .pizza on Friday nights. . .taking your children to the movies. . .filling up your gas tank. . .purchasing a new car. 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 account for increases in the cost of living as you insure your family’s current and future financial security.
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 help you keep pace with inflation and your changing needs. Make the necessary updates before you need them.