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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Life Insurance Products

Ms. Kavita Rao, aged 35, has an annual income of Rs 12 lakh, which she expects to continue for 25 years. Her family's annual expenses attributable to her are Rs 4 lakh, and she has Rs 20 lakh in existing life cover. The adviser uses the simple 'income replacement' method with no discounting: required cover is the present value approximated as the annual contribution to family (Rs 4 lakh) multiplied by years of remaining earning (25), less existing cover. What additional cover is needed?

The additional cover required is Rs 80 lakh. The simple method multiplies the family's Rs 4 lakh annual dependence by 25 years to get Rs 1 crore, then subtracts the existing Rs 20 lakh cover. Ignoring the existing cover would overstate the need at Rs 1 crore.

  1. ARs 80 lakhCorrect
  2. BRs 1 crore
  3. CRs 2.8 crore
  4. DRs 1.2 crore

Explanation

Total need = 4 lakh x 25 = Rs 100 lakh. Subtract existing cover of Rs 20 lakh to get Rs 80 lakh. Rs 1 crore forgets existing cover. Rs 2.8 crore wrongly uses income less expenses at 12 lakh minus 4 lakh over 25 years then less cover.

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