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Consider Inflation When Assessing Your Insurance Coverage

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Consider Inflation When Assessing Your Insurance Coverage

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, taking into account their home mortgage, the projected college education costs of their children, and their living expenses. Well, that was then. . .this is now.

Recently, as they contemplated retirement, Brenda and Jake 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 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. If you have recently purchased a new home or upgraded a home you already own, you may need to consider increasing your life insurance to help cover your mortgage payments. Insurance proceeds may be used to help pay off the mortgage in the event of the insured’s death.

Funding Future College Expenses. Compared to the previous year, the average annual cost of tuition, fees, room, and board for the 2008–09 academic year increased by over 5.5% at both private and public four-year colleges (The College Board, 2009). To be prepared, 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 cover college expenses in the event of an untimely death. Review your strategy periodically, and consider increasing your coverage to reflect the anticipated future cost of higher education.

Maintaining Your St andard 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 gr andchildren, and 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. Your life insurance coverage, based on yesterday’s needs and the current cost of goods and services, may be potentially shortchanging the future st andard of living of your loved ones. Factoring inflation into your life insurance program can help your loved ones maintain their lifestyle upon your death. In addition, if the policy allows, you can make withdrawals to fund your retirement years. However, any loans and withdrawals will decrease the amount of life insurance proceeds, and interest will be charged if the loan is not paid back before the insured dies.

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 family’s 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.

Copyright © 2010 Liberty Publishing, Inc. All Rights Reserved.

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This article appears courtesy of Karl Susman. Karl Susman is a representative of the New Engl and Life Insurance Company. He focuses on meeting the individual insurance and financial services needs of people on the West Coast. You can reach Karl at the office at (424) 785-4337. New Engl and Life Insurance Company, 501 Boylston Street, Boston, MA 02116

Surveying the Economic Horizon

When weather forecasts turn out wrong, we usually can make alternate plans that have little consequence in the larger scheme of life’s events. In contrast, when economic forecasts disappoint, the consequences may be more significant. Nevertheless, making decisions about your financial future involves some guesswork, and an educated guess—even with elements of uncertainty—may be a better alternative than traveling into the future with no forecast at all.

Unfortunately, economic forecasting, like forecasting the weather, is far from an exact science. Even professional economists may strongly disagree on the direction of the economy at any given point in time, based on differing interpretations of conflicting economic indicators. Although many factors are important in assessing the economy, this discussion will focus on two key points that can help you get a better feeling for where our economy currently st ands and in what direction it may be headed in the near future.

How Much Longer?

Economic forecasters are always searching for storm clouds that might signal an economic downturn. Since consumer spending has historically accounted for about two-thirds of the economy, many observers have looked to “pocketbook” issues in search of primary clues as to which way the economy may be heading.

While consumers don’t usually cut back first and cause a recession, buying more on credit translates into greater monthly payments, and at some point, consumers can do only what their incomes will allow. With personal debt historically on the increase, keeping an eye on consumer debt levels is particularly important because of the sheer weight of total consumer spending in our economy. However, it may be wise to eventually concentrate your attention on current federal decisions that set the foundation for our overall economic climate.

The Role of the Federal Reserve Bank (The Fed)

Even the casual observer of business news knows that “Fed watching” is a serious activity in the financial and business sectors. You may be wondering, however, why the Fed is so important.

While consumers can affect the economy by acting according to their own perceptions and pocketbook pressures, federal policy decisions, such as fiscal and monetary measures, can also move the economy. Fiscal policy, enacted by Congress in the form of tax and/or spending legislation, is the by-product of the political process and the prevailing political climate. In contrast, monetary policy is the purview of the Fed, whose role is to evaluate all of the forces acting on the economy (individual, market, and governmental) and to take the action it believes will keep the economy on an even keel.

The Fed can manipulate the money supply in hopes of obtaining a desired effect over time. However, the Fed’s most effective short-range policy decisions with which to manipulate the economy involve short-term interest rates. Consequently, the Fed can realistically have only one target—inflation. If the Fed perceives that prevailing forces will increase inflation, it will attempt to slow the economy by raising short-term interest rates (the assumption being that increases in the cost of borrowing money are likely to dampen both personal and business spending behavior). Conversely, if the Fed perceives the economy has slowed too much, it will attempt to stimulate growth by lowering short-term interest rates (the assumption being that lowering the cost of borrowing will stimulate personal and business spending).

In carrying out this balancing act, a very cautious Fed walks a fine line. If it doesn’t tighten the reins soon enough (by raising interest rates), it runs the risk of inflation getting out of control. If it fails to loosen soon enough (by lowering interest rates), it can plunge the economy into recession. Indeed, one might argue that the primary goal of the Fed is to keep inflation low enough so that it is not a factor in business decisions.

Up, Down, or Sideways?

By looking at your own spending outlook and debt burden ( and that of your friends, relatives, and business associates), you may gain some insight into the short-term future of the economy. While by no means the complete story, it does represent a large chapter since it is the one over which individuals can exercise the greatest control. When combined with a little judicious Fed watching (e.g., several interest rate moves in the same direction may be an indication that the Fed is on a mission), you may have a fairly good basis for making sound decisions with regard to your own financial future.

 

This article appears courtesy of Karl Susman.  Karl Susman is a representative of the New Engl and Life Insurance Company. He focuses on meeting the individual insurance and financial services needs of people on the West Coast.  You can reach Karl at the office at (424) 785-4337. New Engl and Life Insurance Company, 501 Boylston Street, Boston, MA 02116

MetLife does not provide legal or tax advice. Before implementing any strategy discussed herein, you should consult with your own financial, tax, and/or legal advisors to determine its applicability in light of your own situation.

Copyright © 2011 Liberty Publishing, Inc. All Rights Reserved.

L0610113668[exp0611][All States][DC]

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