When Cathy and John Barton 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 Bartons reevaluated their insurance needs and were surprised to discover their insurance coverage is inadequate. How could this be? The answer, in a word—inflation.

Because inflation affects purchasing power, it may also affect life insurance needs. For couples like the Bartons, 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. Changing job markets, along with dual incomes, have altered 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 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 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 will be more common for retirees to have children waiting to attend college. If that is your situation, you are probably concerned about the rising costs of higher education. And, rightfully so! For the 2003-04 academic year, tuition and fees were up 6% from the previous year at private 4-year colleges, and increased 14.1% at public 4-year colleges (The College Board, 2003). To be prepared, factor inflation into your college savings strategies. 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 life insurance 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. Factoring inflation into your life insurance plan can help you maintain your current lifestyle througout 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 some time at least once each year to help ensure your life insurance plan is keeping up with inflation.

When most people think of life insurance, the first thing that usually comes to mind is, "How much do I need?" However, there are other aspects of life insurance policies that provide important benefits and are worth considering.

For example, riders essentially allow policy owners to give themselves and their beneficiaries added protection in the face of certain events. Among the large number of riders that life insurance companies offer, one of the more frequently utilized is the "waiver of premium."

The waiver of premium rider protects you in the event that you are disabled and can no longer afford to pay your life insurance premiums. Not only does the insurance company pay your premiums pursuant to the terms of the contract, but if you own a whole life policy, the policy cash values and dividends generally continue to grow. These increasing policy values can be a ready source of income that you can use to help pay your expenses if you are disabled and can no longer work. You could access these values through loans or surrenders. (Note that loans and withdrawals may result in adverse tax consequences and may carry interest. Cash values and death benefits may be affected, too.)

Eligibility Requirements

Like an applicant's insurability, the availability of the waiver of premium rider may also be based on certain risk factors, such as general health and past medical history. Once issued, most policies contain important eligibility requirements before the waiver of premium rider will take effect. Policies generally contain a specific waiting period (e.g., six months) before premiums begin to be paid under the rider. Some policies apply waiver of premium coverage differently for a disability occurring prior to age 60, compared to one occurring between the ages of 60 and 65. Under many policies, the waiver of premium provision terminates at age 65. While the waiver of premium rider on term and whole life policies will generally cover the entire premium, the waiver may work a little differently on other types of policies, separating the premium waiver for the cost of insurance from that associated with the cash value or investment fund.

The definition of "disability" in your policy is also crucial, because it determines when your obligation to pay premiums ends. The key is usually whether you are "totally disabled" under your policy's definition. While some policies consider total disablement to be when an illness or injury leaves you unfit for your profession, other policies may contain a clause that states you must be unfit for any type of work.

Policy riders tend to take a "back seat" when planning insurance needs, because so much of the initial focus is on how much coverage is necessary to provide adequate protection. However, part of the process of determining adequate protection should also involve taking advantage of the opportunities to customize your life insurance policy so it fully meets your needs.