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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Insurance

Caselet: Mr. Kulkarni, 40, earns Rs 12 lakh a year and plans to retire at 60. His annual expenses are Rs 8 lakh, of which he assumes 75% would continue for his family if he died. He has a home loan outstanding of Rs 30 lakh and other liabilities of Rs 5 lakh. Existing financial assets are Rs 45 lakh. Using the simple human life value plus needs approach, the adviser takes the needs as: 75% of expenses x 10 years of income replacement, plus all liabilities, less existing assets. What additional cover is needed?

The additional cover needed is Rs 50 lakh. Annual family expenses to be replaced are Rs 6 lakh, or Rs 60 lakh over ten years. Adding liabilities of Rs 35 lakh gives Rs 95 lakh, and deducting existing assets of Rs 45 lakh leaves Rs 50 lakh.

  1. ARs 20 lakh
  2. BRs 30 lakhCorrect
  3. CRs 50 lakh
  4. DRs 95 lakh

Explanation

Expense replacement = 0.75 x 8 lakh = Rs 6 lakh a year; for 10 years = Rs 60 lakh. Add liabilities 30 + 5 = 35 lakh, giving 95 lakh. Less assets of 45 lakh gives Rs 50 lakh. So the correct figure is Rs 50 lakh; Rs 95 lakh ignores assets.

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