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When Brenda and Jake purchased their life insurance policies 20 years ago, they thought they did things the right way. They assessed their insurance needs, accounting for 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 couple reevaluated their insurance needs. They were surprised to discover that their insurance coverage was 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 Brenda and Jake, inflation means that life insurance coverage that was 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. Like all markets, the housing market may experience upturns and downturns, but in general, home values tend to rise over time. In addition, greater employment opportunities, dual income households, and changing family dynamics have prompted many families to move or upgrade their homes. If you have recently moved, purchased a larger home, or remodeled your home, you may consider increasing your life insurance to help cover larger mortgage obligations in the event of an untimely death.

Funding Future College Expenses. If you are planning on sending your children to college, you may be concerned about the rising costs of higher education. Compared to the previous year, the average annual cost of tuition, fees, room, and board for the 2008–09 academic year increased over 5% at private and public four-year colleges (The College Board, 2009). To be prepared for these increases, be sure to factor inflation into your college savings strategies. In addition, have a contingency plan in the form of adequate life insurance to help provide protection in the event of your death. Review your plan periodically, and consider increasing your coverage to reflect the anticipated future cost of higher education.

Maintaining Your Family’s Standard of Living. Everyday costs associated with maintaining your family’s lifestyle, such as groceries, clothing, gas, family vacations, and medical expenses, are greatly affected by inflation. If your life insurance needs calculations are based on your current income and today’s cost of goods and services, your family may not have enough to cover the future costs of these expenses in the event of your death. For a comprehensive insurance strategy, include an assessment of both your current and future needs, as well as objectives, to help your family maintain their standard of living.

Future Projections

Determining current life insurance needs is important, but projecting how much coverage you may need in the future requires you to pay careful attention to inflation and how it can affect your lifestyle. Plan to set aside time annually to help ensure that your life insurance program is keeping up with inflation.

Comment by Guy — November 2, 2009, at  1:39 pm