NISM-Series-X-B: Investment Adviser (Level 2) · Case Studies in Comprehensive Financial Advice

Risk Management and Insurance Planning for NISM X-B

Updated 11 October 2026 · Fact-checked

Insurance planning finds how much life, health and general cover a client needs, then picks the right product. For life cover you use the human life value method (value of future income) or the needs-based method (liabilities plus goals minus existing assets). Pure term cover is usually used for protection.

Understand Risk Management and Insurance Planning

Insurance planning starts with one question: what financial loss would the family face if a risk happened? The main risks are death, illness or injury, disability, and loss of property or liability to others. An adviser measures each loss, checks what the client already has, and recommends cover for the gap.

For life insurance there are two standard ways to size cover. The human life value (HLV) method treats the earner as an asset that produces income. You take the income that goes to the family (income less personal expenses and tax), project it over the remaining working years, and bring it to present value at a discount rate. The needs-based approach works from the family's needs. You add up what the family would need after the death: clearing debts, funding goals such as child education and marriage, and replacing income for a period. You then deduct existing assets and existing life cover.

The two methods can give different answers. HLV is simple and uses only income, but it ignores existing assets and the actual goals. The needs-based method is more tailored and is usually preferred in a comprehensive plan, because it reflects the real family situation. Cover that is too high wastes premium. Cover that is too low leaves the family exposed.

Product choice follows the need. Term insurance pays the sum assured only if the life assured dies within the term. It has no maturity benefit, so it gives the highest cover for the lowest premium. Endowment and other traditional plans combine cover with savings and pay a maturity benefit, but the cover per rupee of premium is lower. An adviser normally separates protection from investment: buy term for protection and use suitable investments for goals.

Health and general insurance are indemnity covers. They pay actual loss, up to the sum insured, and are not sized by income. Health cover is sized by hospital costs, city, age, family size and existing employer cover. Employer cover may end if the client changes jobs, so a personal policy is advisable. Other covers, such as personal accident, disability, home and motor, are added based on the client's exposures.

Key formulas to remember

Human life value (simple form): HLV = PV of future annual (income − personal expenses − tax) over the remaining working years; Discount at an assumed rate. Often the discount rate is set against income growth. Uses only income, not existing assets.
Needs-based life cover: Cover required = (Outstanding liabilities + Goal funding needs + Income replacement needs) − (Existing liquid assets + Existing life cover); Future needs should be stated in present value terms before they are added.
Present value of a level annual income: PV = Annual amount × [1 − (1 + r)^−n] ÷ r; Used for income replacement and HLV. Use the rate in the question.
Insurance gap: Gap = Required cover − Existing cover; If the gap is zero or negative, no extra cover is needed.
Term vs endowment rule: Term: pays only on death in the term. Endowment: pays on death or on survival to maturity.; Term has the lowest premium per rupee of cover.

How to solve Risk Management and Insurance Planning questions

Use this order for any case-study question on insurance planning.

1Read the client facts: age, income, dependants, liabilities, goals, existing assets and existing cover.
2Identify the risk asked about: death, health, disability or property.
3For life cover, check which method the question names. Use HLV if it says income or human life value. Use the needs approach if it lists liabilities and goals.
4Compute the required cover using the formula. Put all amounts in present value and in the same units.
5Subtract existing cover and existing liquid assets, as the method allows, to get the gap.
6Choose the product: term for pure protection, and others only if the question gives a clear reason.
7For health and general cover, match cover to the exposure and check existing employer or family cover.
8Re-read the options and pick the one that matches your figure, not one that merely looks close.

Quickest way: Needs total minus resources

When to use it: Use when a caselet lists several debts and goals and you need the extra life cover quickly.

Add the loan balance and all goal amounts that must be funded.
Add the income replacement amount, if given.
Add up existing liquid assets and existing life cover.
Subtract the second total from the first.
If the question asks for the product, pick term for protection.

Common mistakes in Risk Management and Insurance Planning

Using total income instead of income net of personal expenses in HLV.
Students forget the family does not receive the amount the earner spends on themselves.
Fix: Deduct personal expenses and tax first, then discount the remainder.
Forgetting to subtract existing life cover and assets in the needs method.
The gap step is easy to skip when the numbers are long.
Fix: Always finish with Required − Existing. Check the question for any policy already held.
Treating endowment as the best protection plan.
The maturity benefit looks attractive.
Fix: Remember cover per rupee of premium is highest in term. Endowment is a mixed product.
Sizing health insurance by income.
Students carry over life cover logic.
Fix: Health cover is indemnity. Size it by expected medical costs, family size, age and existing cover.
Relying only on employer group cover.
It seems free and sufficient.
Fix: Employer cover can stop on leaving the job. Recommend a personal policy as well.

Worked examples

Example 1

A client has a home loan outstanding of ₹40,00,000, needs ₹20,00,000 for child education and ₹10,00,000 for marriage, and wants ₹30,00,000 set aside to replace income. Liquid assets are ₹15,00,000 and existing life cover is ₹25,00,000. Using the needs-based approach, what additional life cover is required?

Show the solution

Total needs = 40,00,000 + 20,00,000 + 10,00,000 + 30,00,000 = ₹1,00,00,000.
Total resources = 15,00,000 + 25,00,000 = ₹40,00,000.
Additional cover = 1,00,00,000 − 40,00,000 = ₹60,00,000.

Answer: ₹60,00,000

Example 2

A client expects to earn ₹10,00,000 a year for the next 20 years after tax. Personal expenses are ₹4,00,000 a year. Assume the income is level and the discount rate is 5% a year. Using the factor 12.4622 for the present value of ₹1 a year for 20 years at 5%, what is the human life value?

Show the solution

Annual contribution to family = 10,00,000 − 4,00,000 = ₹6,00,000.
HLV = 6,00,000 × 12.4622.
6,00,000 × 12.4622 = ₹74,77,320.

Answer: About ₹74,77,320

Exam tips

Check the method named in the question. HLV and needs-based give different answers on the same client.
In caselets, the existing cover line is often hidden in the last sentence. Read to the end before calculating.
When asked for the best product for pure protection, choose term insurance.
Wrong answers cost 25% of the question's marks, so on 2-mark caselet questions avoid guessing between close options.
For health and general insurance, think indemnity and actual loss, not income.

Practice questions from Case Studies in Comprehensive Financial Advice

Risk Management and Insurance Planning in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Risk Management and Insurance Planning: frequently asked questions

What is the difference between human life value and the needs-based approach?

HLV values the earner's future income that supports the family and discounts it to today. The needs-based approach adds the family's liabilities and goals and subtracts existing assets and cover. HLV uses income only. The needs method uses the actual family situation.

Which method is better for deciding life cover?

The needs-based approach is generally preferred in a comprehensive plan, because it reflects real debts and goals and credits existing assets. HLV is a useful quick check. Follow the method named in the question.

What is the difference between term insurance and an endowment plan?

Term insurance pays only if the life assured dies during the term and has no maturity benefit. An endowment plan pays on death or on survival to maturity. Term gives more cover for the same premium.

How is health insurance planned in a financial plan?

The adviser checks existing employer and personal cover, then sizes the sum insured by expected medical costs, age, family size and city. A personal policy is advised because employer cover can end with the job.