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Get an Insurance Checkup: Part 1

Dan Caplinger
July 5, 2006

Insurance isn't a fun topic to discuss. No one wants to think about dying prematurely, having an accident, going through a natural disaster, or suffering from a crippling injury or disease. Denial doesn't make these tragedies any less likely to occur, but it does make them potentially more devastating than they might otherwise be. Proper planning can make it a little easier to get through tough times.

Now, you may think that you've taken care of all your insurance needs and might therefore be inclined to skip the rest of this article. After all, you bit the bullet and went to an insurance agent, sat through a meeting in which your agent discussed every possible type of insurance anyone could ever possibly need, and picked a reasonable number of policies and types of coverage. Doesn't that mean that you're done worrying about insurance?

The answer, sadly, is no. The problem is that the purpose of insurance is to protect you against risks that you face, and because the risks you face change over time, your insurance needs change over time as well. Because many people are uncomfortable with insurance, they often retain policies and types of coverage that they no longer need, while failing to obtain new policies and types of coverage that they may need for the first time. Here are some guidelines for deciding whether your insurance is doing its job for you.

Life insurance
The primary purpose of life insurance is to replace money that a person would otherwise earn and provide additional funds for any needs that arise because of a person's death. For instance, if a person is married with a child, then one might consider obtaining life insurance that would be sufficient to replace the person's income, as well as pay for the extra expenses that would result from the surviving spouse's new situation as a single parent.

The challenge here is that every one of these variables is constantly changing. Your earnings may rise steadily through periodic raises and bonuses. Your needs for insurance as a single adult may be quite minimal, but they may increase substantially if you choose to start a family. On the other hand, once your children are grown and you have substantial assets accumulated through savings, you may have less need for insurance.

The key to keeping your life insurance up-to-date is to make sure that the total death benefit on any life insurance policies you have is sufficient to meet your needs at that time. If your insurance is insufficient, you may be able to obtain additional insurance, either from your existing insurance company or by obtaining a completely new policy. If you have more insurance than you need, then consider replacing a policy with one that has a smaller death benefit.

In addition, even if your current policy is sufficient, you may wish to consider checking the cost of a new policy with sim