Even though I do not like to write about life insurance, I get too many questions about life insurance. So I thought I should do a follow up story on - If you died tonight, what will your family do?. So I've created some client questions which I hear every day and decided to debunk them.

1. Should I buy life insurance on my child’s name?

The answer is No, Nein, Nyet, Nahi, Nako, Vendam, Na. I am a linguist but there ends my vocabulary for the word 'NO'. In any language, and in any part of the world, there is no logic for buying life insurance for a person on whom nobody is financially dependant. I have heard arguments like ‘What if my child is diabetic and cannot get life insurance later on?’ If this argument is taken to its logical conclusion, you should be buying a policy for at least a few crores, if you take inflation into account – and all companies will deny it. So do not bother.

2. Should I buy unit linked policies as an investment?

This is a very difficult question to answer. So I will split the answer into various parts. Find out how much is the amount that is getting invested and far more importantly what are the fund management charges? (also called asset management charges). As a ball park figure, look for fund management charges lesser than 1%. You will find unit linked policies as well as index funds in that category. Choose only such policies immaterial of the upfront charges. If you are not comfortable with index funds, choose mutual fund ‘managers’ with an excellent track record.

3. Will I really get a policy for 30 years where I have to pay premium for only three years?

A toughie! Every insurance salesman will be up in arms if I say no. I would still stick to my answer. You will have to pay for at least one third of the tenure of the policy. Which means if you take a 30-year plan be prepared to pay for at least 10 years. Vanishing premium promises have resulted in a lot of vanishing policies in the US and Europe.

4. I have some old policies from Life Insurance Corporation. My new agent is asking me to surrender them. What should I do?

Well, the recent love for equities has meant equity haters have all become equity lovers. You need to anyway maintain a balance between equity and debt, so continuing your old LIC policies is not such a bad idea after all. Especially, if your policies have already run for 10 years, the chances are the premium that you may be paying may not be high compared to your current income level. In a worst-case scenario, make it fully paid up – where you do not have to pay the future premium and a reduced cover continues to be available.

(Also read- Money laundering and your life insurance)

5. We are the biggest company in…!

You can fill in the blank as you wish - USA, Europe, among mutual funds, insurance companies. The question to ask is how does it matter to you. All the companies that I know in the private sector make some claim or the other.

6. Our parent companies' credit rating is higher than that of the Government of India; excellent, but er… where do you invest?

Well, we do invest in Government of India securities. So how does the rating help you the policy holder? Search me!

7. I have adequate life insurance but my broker is talking about critical illness insurance. Do I need it?

Well, it is your call. Critical illness insurance appeals to all of us. If I have a critical illness, at least I will get a lump sum, which will take care of some expenses. Please read the policy literature carefully, show it to a doctor if you need to. Most agents find the clauses too difficult to interpret. Do not buy it if you do not understand it. It is your money.

8. My group insurance is adequate

That is a joke. If you are between jobs, you have no cover. If the company goes through a bad phase and does not pay the premium you are doomed. So, chuck your group insurance and take one on your own.

9. My credit card gives me some insurance

Same as group insurance. Your life insurance should be a contract between you and the insurance company. Any other mode is risky. I have not heard of anybody who says “My husband died in an accident and I got Rs 5 lakhs from an accident claim on his credit card insurance”. And I have met more than 10,000 people whom I have spoken about life insurance – these are the people who have attended my seminars or training boot-camps.

10. I am adequately insured, my CA told me

Please do not confuse adequate ‘premium’ for Section 80C with adequate life cover. Go to a professional (no not your neighbour, in-law, colleague). 

(Also read - 8 reasons why you should not select a person as your agent )

The author, PV Subramanyam, is a financial domain trainer. He can be reached at pv.subramanyam@moneycontrol.com.

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