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

Caselet: Mr. Sameer Joshi, 40, earns Rs 12 lakh a year and plans to use the human life value (income replacement) approach. He assumes that Rs 4 lakh of his annual income goes to his own personal expenses and taxes, so Rs 8 lakh supports the family. He has 20 years to retirement and the discount rate net of income growth is taken as 0% for simplicity. He has existing life cover of Rs 50 lakh and financial assets earmarked for family needs of Rs 30 lakh. Based on these assumptions, what is the additional life cover required?

Additional cover needed is Rs 80 lakh. The family-supporting income of Rs 8 lakh over 20 years gives a human life value of Rs 1.6 crore; subtracting existing life cover of Rs 50 lakh and earmarked assets of Rs 30 lakh leaves a shortfall of Rs 80 lakh.

  1. ARs 80 lakhCorrect
  2. BRs 1.1 crore
  3. CRs 1.6 crore
  4. DRs 1.2 crore

Explanation

Human life value = Rs 8 lakh x 20 = Rs 160 lakh. Less existing cover Rs 50 lakh and assets Rs 30 lakh = Rs 80 lakh additional cover. Rs 1.1 crore subtracts only the cover; Rs 1.6 crore ignores resources; Rs 1.2 crore uses gross income less 40 lakh wrongly.

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