Risk Analysis & Insurance Planning (RAIP) – Faculty Copy (Financial Planning Academy)

Lecture No. 1:-

Concept of Sharing of losses:-
1) A village has 400 houses valued at Rs. 2,00,000 each. Every year 4 houses get burnt down on
account of fire. This risk is distributed amongst all house owners. How much does each owner
contribute to cover the risk?

Ans: - Insurance works on the concept of “Sharing of losses”. The loss, so incurred would be shared
across by the total households (i.e. 400 houses).
• Therefore the total loss = Rs. 200,000 x 4 houses = Rs. 8,00,000
• Share of per household = 8,00,000 / 400 houses = Rs. 2000

Human Life Value & Need Base Approach:-

2) Mr. Sharma is 30 years old & plans to retire at the age of 60. He is employed as the Vice President
(Operations) with Global Cosmetic Ltd at an annual remuneration of Rs. 9,50,000, which is increasing
by 5% p.a. His annual expenses are as follows:-
• Personal expenses are to the tune of Rs. 1,50,000.
• Life insurance premium, for self, is Rs. 18,000.
• Life insurance premium of Rs. 10,500 & Rs. 6,500 p.a. for his wife & child respectively.
• Professional tax of Rs. 3,000 &
• Income tax, subject to allowable deductions of Rs. 1,32,000
The rate of interest assumed for capitalization of future income is 8%. Calculate the amount of
insurance cover, required by Mr. Sharma, using Human Live Value (HLV) approach.

Ans: - Human Life Value (HLV) is calculated as = PV (Net Annual Income Lost)

Calculation of Net Annual Income Rs.

Gross Annual Income 9,50,000

(-) Personal Expenses (1,50,000)

(-) Taxes (professional tax + income tax) (1,35,000)

(-) Premium (self) (18,000)

Net Annual Income 6,47,000

Particulars Explanation Rs

Set Money will be received immediately when a person passes away Begin

n No. of years left to retirement (60-30) 30

i% Discounting factor (real rate of return) 2.857142857%

PV We have to solve for PV (i.e. amount of insurance required) ? (1,32,88,013.69)

PMT Net Annual Income that is lost (as calculated above) 6,47,000

FV, P/Y, & Future Value, No. of annual payments & No. of annual 0, 1, 1
C/Y compoundings (respectively)

Notes:-

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• Any life insurance premiums paid, for any member of once family, other than self, should not
be deducted from the Gross Annual Income.

3) Mr. Jagdish has given his personal details as follows:-

Current age = 30 years; plans to retire at 65
Job profile = Sr. Manager in Telco Ltd, with an annual salary of Rs. 10,00,000
Annual Cash Outflow is as follows:-
• Professional tax = Rs. 5,000
• Income tax = Rs. 1,95,000
• Self Maintenance expenditure = Rs. 1,00,000
• Life insurance premiums:-
o Self = Rs. 20,000 (Sum Assured = Rs. 20,00,000)
o Sulekha (wife) = Rs. 13,000 (Sum Assured = Rs. 5,00,000)
o Aditya (son) = Rs. 7,000 (Sum Assured = Rs. 2,00,000)
Assume the rate of interest for capitalization of future income is 10% p.a. As a Financial Planner,
recommend additional insurance cover using “HLV” method.

Ans: -

Calculation of additional insurance required

Particulars Amount (INR)
Amount of insurance required (WNo. 1) 72,13,830.912
(-) Insurance already taken (self) (given) (20,00,000.00)
Additional insurance cover required 52,13,830.912

Human Life Value (HLV) is calculated as = PV (Net Annual Income Lost)

Calculation of Net Annual Income lost

Particulars Amount (INR)
Gross Annual Income 10,00,000
(-) Life insurance premium paid (self) (20,000)
(-) Self maintenance expenditure (1,00,000)
(-) Taxes (professional tax+ income tax) (2,00,000)
Net Annual Income lost 6,80,000

WNo. 1:- Calculation of the Amount of Insurance required

Particulars Amount (INR)
Set Begin
N 35 (65-30)
I% = real rate of return 10
PV = Amount of insurance required ? (Solve = 72,13,830.912)
PMT = Net Annual Income lost (as calculated above) 6,80,000
FV, P/Y & C/Y 0,1,1 respectively

4) A single mother, aged 33 earns Rs. 7,50,000 p.a. out of which taxes & self expenses account for
Rs. 1,50,000 p.a. Her salary is expected to rise by 10% p.a. whereas taxes & personal expenses are
likely to rise by 6% p.a. If she expects to work till 58 years, what economic value can you enumerate

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on her life, if she is confident of getting a return of 9% p.a. from investments (Exam problem – 4
marks)

Ans:-

Calculation of Economic Value

Particulars Amount (INR)
PV (Salary) (WNo. 1) 2,09,67,027.22
(-) PV (Taxes & Self Expenses) (WNo. 2) (27,37,431.68)
Economic Value (i.e. amount of insurance required) 1,82,29,595.54

WNo. 1:- Calculation of PV (Salary)

Particulars Amount (INR)
Set Begin
N 25 (58-33)
I% = real rate of return = [(1.09/1.10)-1]x 100 - 0.909090909
PV ? (Solve = -2,09,67,027.22)
PMT 7,50,000
FV, P/Y, C/Y 0,1,1

WNo. 2:- Calculation of PV (Taxes & Self Expenses)

Particulars Amount (INR)
Set Begin
N 25 (58-33)
I% = real rate of return = [(1.09/1.06)-1]x 100 2.830188679
PV ? (Solve = -27,37,431.68)
PMT 1,50,000
FV, P/Y, C/Y 0,1,1

5) A company has retirement age as 58 years. An employee at age 35 expected increments at 7% p.a.
as per company policy when his annual net earnings were Rs. 6,00,000. After 5 years, he got next
cadre & his annual net earnings became Rs. 9,00,000. The increments in the revised cadre are at 9%
p.a. He had purchased a life cover by income replacement method at age 35. What additional cover is
required if he expects his investments to yield 9.5% p.a.? (Exam problem – 4 marks)

Ans:-

Calculation of additional insurance required

Particulars Amount (INR)
Amount of insurance required at age 40 (WNo. 1) 1,55,86,286.44
(-) Insurance already taken at age 35 (WNo.2) (1,08,30,034.76)
Additional insurance cover required at age 40 47,56,251.68

WNo. 1:- Calculation of insurance required at age 40

Particulars Amount (INR)
Set Begin

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N 18 (58-40)
I% = real rate of return = [(1.095/1.09)-1]x 100 0.458715596
PV ? (Solve = - 1,55,86,286.44)
PMT 9,00,000
FV, P/Y, C/Y 0,1,1

WNo. 2:- Calculation of insurance taken at age 35

Particulars Amount (INR)
Set Begin
N 23 (58-35)
I% = real rate of return = [(1.095/1.07)-1]x 100 2.336448598
PV ? (Solve = - 1,08,30,034.76)
PMT 6,00,000
FV, P/Y, C/Y 0,1,1

6) Mr. Rao is the sole income earner in the family. Ms. Rao is a homemaker. They are aged 40 & 36
respectively. Life expectancy for both of them is another 40 years. They’ve no children. Other
information you’ve is:-
• Current investment portfolio = Rs. 20,00,000
• Estimated final expenses = Rs. 1,00,000
• Present annual expenses = Rs. 3,00,000 (including Rs. 50,000 of Mr. Rao’s personal
expenses)
• Mr. Rao’s post tax income in hand = Rs. 3,50,000
• Assume a post tax inflation adjusted return of 3%.
Calculate the insurance requirement under the Need Based Approach (NBA)

Ans:-

Calculation of insurance required under Need Based Approach

Particulars Amount (INR)
Immediate expenses (i.e. estimated final exp) 1,00,000
(+) PV (Net Ongoing Expenses) (WNo.1) 59,52,053.783
(-) Available assets (i.e. current investment portfolio) (20,00,000)
Insurance required as per NBA 40,52,053.783

WNo. 1:- PV (Net Ongoing Expenses)

Particulars Amount (INR)
Set Begin
N (i.e. life expectancy of surviving spouse) 40
I% = real rate of return 3
PV ? (Solve = 59,52,053.783)
PMT (i.e. present annual exp, after adjusting for Mr. Rao’s personal - 2,50,000 (3,00,000 –
exp) 50,000)
FV, P/Y, C/Y 0,1,1

7) Mr. & Ms. Sharma aged 50 & 47, both have life expectancy of 35 years. Calculate the insurance
required based on Need Based Approach & Income Replacement Approach (i.e. HLV) for Mr.
Sharma. You’ve the following information: -
• Current investments = Rs. 25,00,000
• Expenses = Rs. 3,00,000 (including Rs. 1,00,000 of Mr. Sharma’s personal expenses)
• Mr. Sharma’s income post tax = Rs. 3,50,000

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• Final Costs = Rs. 1,00,000

• Inflation rate = 5% p.a. Return on investments =8% p.a.
Ans:-

Calculation of insurance required under Need Based Approach (NBA)

Particulars Amount (INR)
Immediate expenses (i.e. final costs) 1,00,000
(+) PV (Net Ongoing Expenses) (WNo.1) 45,13,873.126
(-) Available assets (i.e. current investments) (25,00,000)
Insurance required as per NBA 21,13,873.126

WNo. 1:- PV (Net Ongoing Expenses)

Particulars Amount (INR)
Set Begin
N (i.e. life expectancy of surviving spouse) 35
I% = real rate of return = [(1.08/1.05)-1] x 100 2.857142857
PV ? (Solve = 45,13,873.126)
PMT (i.e. present annual exp, after adjusting for Mr. Sharma’s - 2,00,000 (3,00,000 –
personal exp) 1,00,000)
FV, P/Y, C/Y 0,1,1

Calculation of insurance required under Human Life Value (HLV)

Particulars Amount (INR)
PV (Net Annual Income Lost) (WNo. 2 & 3) 56,42,341.408

WNo. 2:- Calculation of Net Annual Income lost

Particulars Amount (INR)
Gross Annual Income 3,50,000
(-) Life insurance premium paid (self) NA
(-) Self maintenance expenditure (1,00,000)
(-) Taxes (professional tax+ income tax) NA
Net Annual Income lost 2,50,000

WNo. 3:- Calculation of the Amount of Insurance required

Particulars Amount (INR)
Set Begin
N 35
I% = real rate of return = [(1.08/1.05)-1] x 100 2.857142857
PV = Amount of insurance required ? (Solve = 56,42,341.408)
PMT = Net Annual Income lost (as calculated above) 2,50,000
FV, P/Y & C/Y 0,1,1 respectively

8) A family’s monthly expenditure is Rs. 40,000. The earner accounts for 15% of the expense. He
wants to cover his family’s inflation adjusted expenses for the next 40 years considering average
inflation at 5.5% p.a. and the investment return at 7.5% p.a. The approximate life insurance needed
is____________ (Exam problem – 3 marks)

Ans:-

Calculation of insurance required

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Particulars Amount (INR)

PV (Net monthly family expenses) (WNo. 1 & 2) 1,14,84,273.3

WNo. 1:- Calculation of Net Family Expenses

Particulars Amount (INR)
Gross monthly family expenditure 40,000
(-) Expenses of the earner (15% of Rs. 40,000) (6,000)
Net monthly family expenditure 34,000

WNo. 2:- Calculation of the Amount of Insurance required

Particulars Amount (INR)
Set Begin
N = No. of payment periods 40 x 12 = 480
I% = real rate of return = [(1.075/1.055)-1] x 100 1.895734597
PV = Amount of insurance required ? (Solve = 1,14,84,273.3)
PMT = Net monthly family expenditure (WNo. 1) - 34,000
FV, P/Y & C/Y 0,12,1 respectively

9) Your client is 32 years old & has Rs. 25,00,000 in loan liabilities. He has a non working spouse of
age 30 & children of age 7 years & 5 years. Additionally, the client wants higher education for each of
his children to the tune of Rs. 30,00,000 after 15 years & marriage expenses of Rs. 15,00,000 after 20
years (both are considered at current costs). The present household expenses are Rs. 50,000 per
month, which includes housing loan EMI of Rs. 15,000. The client consumes, Rs. 8,000 per month as
personal expenses. He also wants to provide for 50 years living expenses for his spouse. He has an
insurance cover of Rs. 40,00,000 presently & his financial investments are Rs. 15,00,000. The
additional quantum of life insurance cover is ____________ (Assume:- All expenses required are
inflation adjusted at an average inflation of 5% p.a. & the claim amount invested to yield is 8% p.a.)
(Exam problem – 4 marks)

Ans:-

Amount of additional life insurance required

Particulars Amount (INR)
PV (Loan) (given) 25,00,000
(+) PV (higher education for both children) (WNo. 1 & 2) 39,32,189.184
(+) PV (marriage expenses) (WNo. 3 & 4) 17,07,780.799
(+) PV (living exp for spouse) (WNo. 5 & 6) 86,99,400.523
(-) Insurance cover already taken (given) (40,00,000)
(-) Available investments (given) (15,00,000)
Additional life insurance cover required 1,13,39,370.51

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WNo. 1:- Cost of higher education after 15 WNo. 2:- Amount to be invested today to
years achieve the education cost after 15 years
Particulars Amount (INR) Particulars Amount (INR)
Set Begin Set Begin
N 15 N 15
I% = inflation rate 5 I% = investment rate 8
PV - 60,00,000 PV ? (Solve = - 39,32,189.184
PMT 0 PMT 0
FV ? (Solve = 1,24,73,569.08) FV 1,24,73,569.08
P/Y & C/Y 1 P/Y & C/Y 1

WNo. 3:- Cost of marriage expenses after 20 WNo. 4:- Amount to be invested today to
years achieve the cost of marriage after 20 years
Particulars Amount (INR) Particulars Amount (INR)
Set Begin Set Begin
N 20 N 20
I% = inflation rate 5 I% = investment rate 8
PV - 30,00,000 PV ? (Solve = - 17,07,780.799)
PMT 0 PMT 0
FV ? (Solve = 79,59,893.115) FV 79,59,893.115
P/Y & C/Y 1 P/Y & C/Y 1

WNo. 5:- Net household expenses (per month) WNo. 6:- PV of living expenses
Particulars Amount (INR) Particulars Amount (INR)
Present household exp 50,000 Set Begin
(-) EMI (loan amount (15,000) N 50 x 12 = 600
shown separately) I% = real rate of return 2.857142857
(-) Personal exp (8,000) = [(1.08/1.05)-1] x 100
Net household exp 27,000 PV ? (Solve =
86,99,400.523)
PMT - 27,000
FV, P/Y , C/Y 0, 12 , 1 (resp)

10) Ravi wants to know how much approximately he should be covered with life insurance, if he
wants to provide Abhilasha throughout her life time an amount equal to 80% of their household
expenses inflation linked. Assume that, she would invest the proceeds of such claim in risk free
investment.
Assumption:-
• Current age of Ravi = 29 years & Abhilasha = 28 years
• Life expectancy of Ravi = 75 years & of Abhilasha = 80 years
• Inflation = 5.50% p.a. & Risk free rate = 6.50% p.a.
• Current household expenses = Rs. 20,000 per month (Ignore taxes & other charges)

Ans:-

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Calculation of life insurance coverage for Mr. Ravi

Particulars Amount (INR)
Set Begin
N = (LE – CA) of Ms. Abhilasha – surviving spouse 52 x 12 = 624
(i.e. 80 – 28 = 52)
I% = real rate of return = [(1.065/1.055)-1] x 100 0.9478672986
PV ? (Solve =78,93,972.085)
PMT - 20,000 x 80% = -16,000
FV, P/Y , C/Y 0, 12,1 (respectively)

11) The earning member of a family aged 35 years expects to earn till the next 25 years. He expects
an annual growth of 8% in his existing net income of Rs. 5,00,000 p.a. If he considers an average
investment yield of 6% till his life expectancy of 80 years, what economic value could be ascribed to
his life today? (Exam problem – 3 marks)

Ans:-

Calculation of economic value of the earning member of the family

Particulars Amount (INR)
Set Begin
N = earning period 25
I% = real rate of return = [(1.06/1.08)-1] x 100 -1.851851852
PV ? (Solve =1,57,85,661.56)
PMT 5,00,000
FV, P/Y , C/Y 0, 1,1 (respectively)

Notes:-
• The life expectancy of 80 years is redundant – we have calculated the amount of insurance
required for the client using the HLV method (i.e. the net amount lost)

Concept of Risk
12) Mr. Mahesh, age 30, is suffering from cancer. The doctors have lost all hope & his death is
certain. Mr. Mahesh reaches out to his friend, Mr. Suresh, who is an insurance agent, asking to buy an
insurance policy worth Rs. 10 Cr. Mr. Mahesh is financially sound & can easily afford the premiums
towards the policy. Should an insurance policy be offered to Mr. Mahesh by the insurance company?

Ans:-“Risk” is defined as a possibility that the actual outcome may differ from the expected outcome.
The word “possibility” here, signifies, “uncertainty”. So, insurance can be offered only when there is
an uncertainty in the outcome of an event. Here, Mahesh is suffering from cancer & his death is
“inevitable - i.e. certain”. So offering him insurance wouldn’t be feasible.

Kindly note that, although “death” is a certain outcome for all of us, insurance basically covers the
“timing” of death. The moment, the timing is certain, the concerned individual loses out on his option
to protect him through insurance.

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13) Ms. Sonam is very close to her mother & would like to cover her motherly love & affection.
BCCI are very impressed by the way M S Dhoni has captained the Indian side. In a short span of time,
he has gone on to be the best captain of India ever. BCCI would like to buy an insurance policy
covering his leadership skills. Sonam & BCCI have approached LIC asking them to help them with an
insurance cover. Would it be possible for LIC to offer them an insurance policy?

Ans:-Insurance covers “financial risks” (i.e. risks which can be quantified in terms of money) but it
cannot issue an insurance policy to cover any risk which cannot be quantified in financial terms. Both
the risks stated above (“love & affection” & “leadership qualities”) are “non financial risks” & so
cannot be insured.

14) Jay, age 24, is a trader & trades regularly in the stock & commodities market. He has been a very
active trader & has made a considerable amount of income through executing trades. Off late, he is
making losses & is keen to minimize his losses as much as he can. Rohan, his friend & an insurance
advisor has suggested him to buy an insurance policy to cover the losses he may incur in trading.
Would Jay be able to buy an insurance policy to cover his losses?

Ans:- Insurance only covers “pure risks” (i.e. pure risks have only two possible outcomes - either a
loss or no loss, but never ever a possibility of gain). Jay is into buying & selling of shares (i.e.
speculative activity). Insurance doesn’t cover speculative activities. If insurance started covering
speculative activities then everybody will try to profit out of insurance - thus defeating the whole
objective and purpose of insurance.

15) Mr. Gada has taken a life insurance policy covering him for death. He has taken an insurance
cover for Rs. 10 Crore & has been paying the premiums regularly. While traveling to New Jersey, he
was caught in an earthquake, where he lost his life. His family has put across a claim with the
insurance company for Rs. 10 Crore. Will the claim amount be sanctioned?

Ans: - Life insurance covers death caused due to any means. Even if death has been caused on
account of a natural disaster & if the insured has been paying premiums regularly, the same would be
covered under life insurance. (However, if Mr. Gada is staying in area which is prone to earthquakes
or has earthquakes more often, and say he applies for a life insurance cover, then the insurance
company may either:-
1. Specifically exclude death on occasion of an earthquake or
2. Include death on occasion of an earthquake but with an increase in premiums or
3. Reject his request for life insurance completely).

16) Mr. Gada has taken a property insurance policy covering his property for damage & destruction.
He has taken an insurance cover for Rs. 10 Crore & has been paying the premiums regularly. While
traveling to New Jersey, he came to know that, there has been a massive earthquake at his home town,
damaging his property. He has put across a claim with the insurance company for Rs. 10 Crore. Will
the claim amount be sanctioned?

Ans: - Unless otherwise stated in the policy, damage/destruction caused to property on account of any
natural disaster is specifically excluded under general insurance (Key: - The movie, “Oh my god”)

17) Mr. Himanshu is a businessman and has wants to know if he could insure his business which is
affected due to the following uncertain activities
1. Inflation
2. Political upheavals

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3. Technological changes
4. Fire, theft & misappropriation

Ans:- Insurance covers only “particular risks & static risks” (i.e. risks which affect only individuals &
not the whole population). It doesn’t cover “dynamic & fundamental risks”(i.e. risks which occur due
to changes in economy or which affect large section of the population). Fire, theft & misappropriation
are particular risks & so would be covered under insurance. While inflation, political upheavals &
technological changes are fundamental & dynamic risks & thus cannot be covered under insurance.

Lecture No. 2:-

Principles of insurance:-
18) A machinery which is 3 years old, meets with an accident & there is total loss. The cost of new
machinery today is Rs. 400,000. The depreciation for the 3 years is Rs. 150,000. What is the claim
amount which will be payable by the insurance company?

Ans:- According to the “principle of indemnity”, the insured must be placed in the same position
that he was prior to the occurrence of loss. The above example, is an example of “Market Value
Policy”, from which depreciation amount is to be deducted & the net amount is payable to the insured.
However, kindly note that, under no circumstances, would the claim amount settled would be more
than the sum assured.

19) A training institute bought 50 computers at a total cost installed for Rs. 25,00,000. The set up
came into operation on 1st April, 2012. The cost of a similar new computer in due course declined to
Rs. 42,000. The industry norm of the depreciation charged on the computers is 30% on written down
value (WDV). At what appropriate value he should insure the set up on next due date of 1st April,
2013? (Exam problem – 3 marks)

Ans:-

Calculation of insurance required as on 1st April, 2013

Particulars Amount (INR)
Replacement Cost (as on 1st April, 2013) (Rs. 42,000 x 50 computers) 21,00,000
(-) Depreciation @ 30% (WDV) (Balancing figure) (6,30,000)
Appropriate value to be insured (as on 1st April, 2013) (WNo. 1) 14,70,000

WNo 1:- Appropriate value to be insured as on 1st April, 2013 at a depreciation rate of 30% WDV
(using CMPD function)
Particulars Amount (INR)
Set Begin
N = 2013 – 2012 = 1 1
I% = depreciation rate - 30
PV = replacement cost (as calculated above) 21,00,000
PMT 0
FV = appropriate value to be insured ? (Solve = 14,70,000)
P/Y & C/Y 1,1 (respectively)

Notes:-
• We used CMPD function to calculate the amount of depreciation & the amount of insurance
required because; the question has specifically mentioned that, the depreciation is calculated
at 30% p.a. on WDV basis

20) A businessman bought a piece of land in March’ 2002 for Rs. 80,00,000. He got a factory built
on the land at a cost of Rs. 90,00,000, the factory became operational on 1st Sept, 2005. The land

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prices have appreciated at 15% p.a. in the period and the construction cost has escalated at 12% p.a.
since 2005. At what value, should the factory be insured in April, 2013 on Market Value basis if the
depreciation on factory premises is charged at 6% p.a. on straight line method (SLM) (Exam
problem – 3 marks)

Ans:-

Calculation of insurance required as on 1st April, 2013

Particulars Amount (INR)
Replacement Cost of factory (as on 1st April, 2013) (WNo . 1) 2,22,83,668.59
(-) Depreciation @ 6% (SLM) (WNo. 2) (1,06,96,160.92)
Appropriate value to be insured (as on 1st April, 2013) (WNo. 2) 1,15,87,507.67

WNo 1:- Calculation of Replacement Cost of factory as on 1st April, 2013

Particulars Amount (INR)
Set Begin
N = 2013 – 2005 8
I% = escalation rate 12
PV = Cost of factory in 2005 -90,00,000
PMT 0
FV ? (Solve = 2,22,83,668.59)
P/Y & C/Y 1,1 (respectively)

WNo 2:- Appropriate value to be insured as on 1st April, 2013 at a depreciation rate of 6% SLM
(using SMPL function)
Particulars Amount (INR)
Set 365
Dys 365 x 8 = 2920
I% = depreciation rate -6
PV = replacement cost of factory (as calculated above) (WNo. 1) 2,22,83,668.59
SI = Solve = depreciation 1,06,96,160.92
SFV = Solve = appropriate value to be insured 1,15,87,507.67

Notes:-
• Land is a non depreciable asset & will not be brought into consideration for calculating
insurance
• We used SMPL function to calculate the amount of depreciation & the amount of insurance
required because; the question has specifically mentioned that, the depreciation on factory
premises is calculated at 6% p.a. on SLM basis

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21) Mr. Gandhi, has taken 2 mediclaim policies covering the same peril. Policy A (issued by XYZ
Insurance company) is worth Rs. 300,000 while Policy B (issued by PQR insurance company) is
worth Rs. 200,000. He incurs a heart attack & is immediately hospitalized. The total cost of
hospitalization comes to around Rs. 150,000. Mr. Gandhi approaches you, a qualified financial
planner, inquiring if he could raise a claim request (of Rs. 150,000) to both the companies (i.e.
company XYZ & PQR). What would you suggest?

Ans: - In this case the second policy would be hit by the “Principle of Contribution”. Raising a
request with both the companies means he is paid twice for a single claim, thus the claimant would
end up profiting from insurance.

22) Mr. Jay’s car was hit by a vehicle, which was being driven by Ms. Unnati. Mr. Jay reached out to
his employer ICICI Lombard to make good the losses (say Rs. 7,000). ICICI Lombard, paid the claim
amount raised to Mr. Jay in full settlement. Mr. Jay now decides to sue Ms. Unnati too for the
damages. What is the amount that Ms. Unnati would pay to Mr. Jay?

Ans: - As per the “Principle of Subrogation”, once the claim amount is settled, the insurer steps into
the shoes of the insured (i.e. in this case, ICICI Lombard, will step into the shoes of Mr. Jay) & is
entitled to recover from the defaulting party a sum (to the extent paid to the insured). The principle of
subrogation thus stops the insured from profiting out of insurance.

23) Ms. Mehta, age 30, is planning to take a life insurance policy. She has a family medical history of
high diabetes. Ms. Mehta takes a life insurance policy worth Rs. 2 crore. She doesn’t disclose the
same to Max Life Insurance while taking the term insurance policy. The insurance premium
calculated by the company is with regards to a normal healthy individual. She pays the premium
regularly. One fine day, she meets with an accident, where in she looses a lot of blood & the doctors
couldn’t operate her because she was a high diabetic & they had to bring it in control before they
could take things forward. Ms. Mehta passed away because of the same.
What should Max Life Insurance do?

Ans: - Ms. Mehta was suffering from high diabetes at the time of death. Moreover she didn’t disclose
her family history of diabetes at the time of taking the policy. In this case, she has breached the
“principle of utmost good faith” & Max Life insurance can repudiate the claim on this ground. The
claim has now become voidable at the option of Max Life Insurance.

24) Mr. Mehta, age 35, stays in a bungalow at Navsari, Gujarat. His bungalow is next to Mr. Shah’s
who is out most of the times & has left the keys for safekeeping of the bungalow with Mr. Mehta. Mr.
Mehta fears that, there is a possibility that Mr. Shah’s bungalow may catch fire due to short circuit or
otherwise, because of which his bungalow may be caught in fire too. He gets in touch with ICICI
Lombard asking them if he can insure the bungalow of Mr. Shah.

Ans: - As per the principle of “insurable interest”, there has to be a financial interest in the subject
matter to be insured, i.e. Mr. Mehta should incur a financial loss if Mr. Shah’s bungalow gets burnt
down by fire. Since, Mr. Mehta won’t incur a financial loss if Mr. Shah’s bungalow gets burnt down
by fire (he would incur a loss only if the fire is spread to his bungalow), Mr. Mehta won’t be eligible
to buy insurance on Mr. Shah’s bungalow.

25) Mr. Kelkar owns a flat worth (market value) Rs.20,00,000 in the outskirts of Mumbai. He had
insured it only for Rs 16,00,000. The flat is damaged by an earthquake (he had requested cover from
natural & manmade disasters too), which loss is assessed at Rs.400,000. How much claim payment
Mr. Kelkar will get?

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Ans: - As per the “principles of average”, the claim amount that is payable to Mr. Kelkar would be
as follows:-
• Amount payable by the insurance company = [Sum insured / Market value] x Loss
• Therefore, claim payable = [16,00,000 / 20,00,000] x 400,000 = Rs. 32,000
The objective of the “principle of average” is that, if there is an underinsurance, the insured is
considered to be his own insurer to the extent of the underinsurance. This means, the insured will bear
part of the loss as a penalty for underinsurance.

26) A departmental store has rented a space in a mall. The store took insurance of goods housed in the
shop for a value of Rs. 2.1 crore. The surveyor assessed the average value of goods stored at the
facility at Rs. 2.5 crore. The store in its quarterly stock taking on 31st December, 2012 assessed value
of the goods at landed cost of Rs. 1.8 crore. On 17th January, 2013 the store had a major fire
destroying all goods stored therein. The store as per sales records had sold goods for Rs. 35,00,000 in
the interim, making a profit of Rs. 7,50,000. The admissible amount of the claim is _____ (Exam
problem – 4 marks)

Ans:-

Calculation of admissible amount of claim

Particulars Amount (INR)
Insurance taken for the goods housed in the shop (a) 2,10,00,000
Surveyor assessed the average value of goods stored at the facility (b) 2,50,00,000
Therefore, percentage value of goods insured (c ) = (a/b) x 100 (2,10,00,000/2,50,00,000) x
100 = 84%
Note: - It’s quite evident, from point (c) that, there has been an underinsurance here. Only 84%
worth of goods have been insured. The “principle of average” becomes applicable automatically &
so incase of any loss the insurer will only make good the loss to the extent of 84% (i.e. the insured
would bear 16% of the loss from his own pocket)
Landed cost of goods (31st Dec, 2012) (d) 1,80,00,000
st th
(-) Cost of Goods sold between 1 Jan – 16 Jan, 2013 (35,00,000 – (27,50,000)
7,50,000) (e)
Goods destroyed by fire (f) = (d-e) 1,52,50,000
Therefore, the admissible amount of claim (g) = (f) x 84% 1,28,10,000

27) Mr. Patil had insured his house, against fire, with HDFC Ergo General Insurance covering his
house for a sum of Rs. 2 Crore on 16th Jan, 2012. The house caught fire on 23rd July, 2012. While
trying to arrest the spread of the fire, the officers of the fire brigade department, took up some
furniture & threw it down from the house. While raising a claim with HDFC, Mr. Patil claimed the
damage to the furniture too (which was thrown down from the house). What would be the stand of the
insurer?

Ans: - As per the “principle of proximate cause” - the initial event in the chain of events that caused
the loss needs to be looked at while accepting claim settlement requests. The rule is that for the loss to
be paid or compensated under an insurance policy, it must have been caused by an insured peril.
Unless the loss is proximately caused by an insured peril, the policy doesn’t pay or respond. In this
case, the furniture was thrown out of the house to arrest the spreading of the fire. Mr. Patil had taken
an insurance policy against fire. Since, fire is an insured peril, the loss of damage of furniture gets
covered.

Lecture No. 3:-

Clauses:-

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28) Ms. Jiah Khan, aged 30, has taken a term insurance policy on 12th Feb, 2013 from her agent Mr.
Suraj Panscholi. The sum insured was Rs. 15 Cr. Ms. Khan committed suicide on 16th Nov, 2013.
The nominee of Ms. Khan puts across a claim request with Mr. Suraj Panscholi for the sum insured.
Mr. Suraj promises that the insurance company (assume as Birla Sunlife) would repay the promised
sum insured. As a financial planner, do you agree with the advice given across by Mr. Suraj?

Ans: - In this case, the “suicide clause” has automatically been triggered. The suicide clause gets
triggered, if the insured commits suicide within 1 year of taking the life insurance policy.

29) Mr. Suhas (30) had taken a life insurance policy in the name of his wife Ms. Suhas (25) on 1st
Jan, 2013 for a sum of Rs. 500,000 from LIC. Ms. Suhas died a sudden death on 2nd Feb, 2015. Mr.
Suhas who was the policyholder, requested for the claim amount. On further investigation by the
police, it was found out that, Ms. Suhas was murdered by her husband only to claim the policy money
to pay of his debts. Will LIC settle the claim amount?

Ans: - LIC won’t settle the claim as insurance cannot be taken for an illegal objective.

30) A car is to be insured for Rs. 2,00,000. An insurance company quotes a premium of Rs. 10,000 for
a deductible clause (Rs. 3000) & premium of Rs. 12,500 for a Franchise clause. A total expense of Rs.
20,000 towards repairs would result in claim settlement of _________ under Excess clause and
________ under Franchise clause. (Exam problem – 2 marks)

Ans:-

Claim settlement under the Excess clause Claim settlement under the Franchise
Particulars Amount (INR) clause
Total expense 20,000 Particulars Amount (INR)
(-) Excess (deductible) (3,000) Total expense 20,000
Claim settlement under the 17,000 Franchise (deductible) 3,000
Excess clause Claim settlement under 20,000
the Franchise clause

Calculation of claim amount (death claim & maturity claim):-

31) Pavandeep has been paying quarterly premium of Rs. 4,000 for a 20 year money back policy
purchased on 27th January 2001, which pay sum equal to 20% of the sum assured to him after every 4
years period. Quarterly premium due in January’ 2013 for this policy, was paid within the grace
period, as on 6th Feb, 2013. Pavandeep wants to know from you, what approximate amount of claim
his nominee would receive from this policy, incase of any eventuality on the 28th Feb, 2013 (i.e.
today)? Accumulated bonuses under the policy are Rs. 90,000 & sum assured is Rs. 3,00,000

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Ans:-

Calculation of net amount to be paid to the nominee (i.e. Death Claim)

Particulars Amount (INR)
Sum Assured (full amount of money will be paid to the nominee irrespective of 3,00,000
the yearly disbursements made)
(+) Vested Bonus / Accumulated Bonus 90,000
(+) Interim Bonus Nil
Gross Amount to be paid to the nominee 3,90,000
(-) Unpaid Premiums (Rs. 4,000 x 3 quarters) (12,000)
Net amount to be paid to the nominee / Death Claim 3,78,000

32) A prospect and a planner agreed for an endowment assurance policy for Rs. 4,00,000, wherein the
premium is paid for a limited term of 10 years & the policy period is for 20 years. The revisionary
bonus is taken as 7.5 per thousand of sum assured & terminal bonus as Rs. 150 per thousand of sum
assured. The maturity values will be_______?

Ans:-

Calculation of Net amount to be paid to the insured on maturity (i.e. Maturity Value)
Particulars Amount (INR)
Sum Assured 4,00,000
(+) Vested Bonus / Accumulated Bonus / Revisionary Bonus 60,000
[( 7.5/1,000)x4,00,000]x20 years
(+) Terminal Bonus [(150/1,000)x4,00,000 60,000
Gross Amount to be paid to the nominee 5,20,000
(-) Unpaid Premiums Nil
Net amount to be paid to the insured on maturity (i.e. Maturity Value) 5,20,000

33) Prabhat gives you information that, the insurance company has declared revisionary bonus of Rs.
60/1000 of sum assured for first 10 years & 50/1000 sum assured for next 6 years. According to you,
in Prabhat’s money back insurance plan of 20 year term, with sum assured of Rs. 5,00,000, with an
annual premium of Rs. 23,750, he has paid 16 premiums till date. What amount of death claim would
be received by the nominee incase of any eventuality with Prabhat’s life today?

Ans:-

Calculation of net amount to be paid to the nominee (i.e. Death Claim)

Particulars Amount (INR)

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Sum Assured 5,00,000

(+) Vested Bonus / Accumulated Bonus/ Revisionary Bonus 4,50,000
First 10 years = [(60/1,000)x5,00,000]x 10years = 3,00,000
From 11th year to 16th year = [(50/1,000)x 5,00,000] x 6years = 1,50,000
(+) Interim Bonus Nil
Gross Amount to be paid to the nominee 9,50,000
(-) Unpaid Premiums Nil
Net amount to be paid to the nominee / Death Claim 9,50,000

34) A money back life insurance policy, in which Satish is the life assured, for a basic sum assured of
Rs. 5,00,000. Date of commencement is 15th March, 1995, term 20 years & maturing on 15th March,
2015, has 30 days grace period for paying the renewal premium. The survival benefits payable are
20% at the end of 5, 10, 15 years & 40% at the end of 20 years. A revisionary bonus of Rs. 24/1000 is
also payable at the end of the policy term. Assume all due survival benefits have been received on
their respective due dates & will continue in future. What is the maturity amount from this life
insurance policy?

Ans:-

Calculation of Net amount to be paid to the insured on maturity (i.e. Maturity Value)
Particulars Amount (INR)
Sum Assured (20th year) (5,00,000 x 40%) 2,00,000
(+) Vested Bonus / Accumulated Bonus / Revisionary Bonus 2,40,000
[( 24/1,000)x5,00,000]x20 years
(+) Terminal Bonus Nil
Gross Amount to be paid to the nominee 4,40,000
(-) Unpaid Premiums Nil
Net amount to be paid to the insured on maturity (i.e. Maturity Value) 4,40,000

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Lecture Nos: - 4 & 5

Random concepts:-
35) Mr. A has a gross annual salary of Rs. 10,00,000 of which he saves 25% towards mandatory
savings & investments. Another 35% goes towards servicing of housing, car loans & taxes. His
Financial Planner advises him to accumulate 8 months household expenses in liquid funds. He
changes his job & expects an immediate rise of 30% in his gross income. The incremental effect in his
mandatory savings & taxes would be 1.5% & 3% respectively of his revised gross income. You
expect that other heads would not change materially except his household expenses which would rise
by 8% due to child education. How many months will it take to accumulate liquid reserves? (Exam
problem – 4 marks)

Ans:-

Calculation of the no. of months to accumulate the necessary liquid reserves

Particulars Amount (INR)
Gross annual salary (old) (a) 10,00,000
Mandatory savings & investments (b) = (a x 25%) 2,50,000
Housing, car loans & taxes (c) = (a x 35%) 3,50,000
Balancing figure (d) = (a – b – c) (Household expenses) 4,00,000
Mr. A changes his job
New gross annual salary (e) = [a + (a x 30%)] 13,00,000
Incremental effect in mandatory savings & investments (f) = [b + (e x 2,69,500
1.5%)]
Incremental effect in taxes (g) = [c + (e x 3%)] 3,89,000
Note:- The incremental effect is mentioned specifically to be on his “revised gross
income”
Revised household expenses (h) = [d + (d x 8%)] 4,32,000
Amount available for investments in liquid funds (Balancing figure) 2,09,500
(i) = (e – f – g – h)
Required liquid fund reserves (j) =( h /12 months) x 8 months 2,88,000
No. of months to accumulate the necessary liquid fund reserves 16.49642005
(k) = (j / I ) x 12 months

36) Mr. A has invested in an instrument for 3 years. The instrument has produced a return of 11%,
15% & 12% in 3 years respectively. You, as Mr. A’s Financial Planner have observed that, the ruling
inflation in these 3 years was 4%, 7% & 8% respectively. You find the real rate of return which Mr. A
has received as __________ (Exam problem – 4 marks)

Ans:-

Calculation of FV for Yr. 1

Particulars Amount (INR)
Set Begin
N 1
I% = real rate of return = [(1.11/1.04)-1] x 100 6.730769231
PV = assumed - 100
PMT 0
FV ? (Solve = 106.7307692)
P/Y & C/Y 1,1 (respectively)

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Calculation of FV for Yr. 2

Particulars Amount (INR)
Set Begin
N 1
I% = real rate of return = [(1.15/1.07)-1] x 100 7.476635514
PV = FV of Yr. 1 - 106.7307692
PMT 0
FV ? (Solve = 114.7106398)
P/Y & C/Y 1,1 (respectively)

Calculation of FV for Yr. 3

Particulars Amount (INR)
Set Begin
N 1
I% = real rate of return = [(1.12/1.08)-1] x 100 3.703703704
PV = FV of Yr. 2 - 114.7106398
PMT 0
FV ? (Solve = 118.959182)
P/Y & C/Y 1,1 (respectively)

Calculation of real rate of return earned by Mr. A

Particulars Amount (INR)
Set Begin
N 3
I% = real rate of return ? (Solve = 5.957732648)
PV = of Yr. 1 - 100
PMT 0
FV = of Yr. 3 118.959182
P/Y & C/Y 1,1 (respectively)

37) An entrepreneur setting up a leather processing unit purchased a land in 2006 for Rs. 50,00,000 &
got specialized construction done in 2007 for Rs. 1,60,00,000. In March 2008, the processing plant
was constructed at a cost of Rs. 2,00,00,000. The cost of such construction & plant are escalating at
10% p.a. The corrosive nature of the chemicals requires depreciation on plant as well as premises at
15% p.a. on written down value (WDV) basis. As in 2013, what additional reserves should be created
by the company, apart from depreciation reserves & the residual insured value of plant & premises, to
reinstate the facility incase it is destroyed in a calamity? (Exam problem – 4 marks)

Ans: - Method 1

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Calculation of additional reserves to be created

Particulars Amount (INR) Amount (INR)
Reinstatement Value:-
Premises (WNo. 1) 2,83,44,976
Plant (WNo. 2) 3,22,10,200 6,05,55,176.00
(-) Depreciation Reserves:-
Premises (WNo. 4) 99,65,607.75
Plant (WNo. 6) 1,11,25,893.75 (2,10,91,501.50)
(-) Residual Value:-
Premises (WNo. 3) 60,34,392.25
Plant (WNo. 5) 88,74,106.25 (1,49,08,498.50)
Additional Reserves to be created 2,45,55,176.00

WNo. 1:- Calculation of Reinstatement Value of premises (i.e. specialized construction) in 2013
Particulars Amount (INR)
Set Begin
N = 2013 – 2007 6
I% = escalation cost 10
PV = cost in 2007 - 1,60,00,000
PMT 0
FV = value as in 2013 ? (Solve = 2,83,44,976)
P/Y & C/Y 1,1 (respectively)

WNo. 2:- Calculation of Reinstatement Value of plant in 2013

Particulars Amount (INR)
Set Begin
N = 2013 – 2008 5
I% = escalation cost 10
PV = cost in 2008 - 2,00,00,000
PMT 0
FV = value as in 2013 ? (Solve = 3,22,10,200)
P/Y & C/Y 1,1 (respectively)

WNo. 3:- Calculation of residual value for premises

Particulars Amount (INR)
Set Begin
N = 2013 – 2007 6
I% = depreciation rate -15
PV = cost in 2007 - 1,60,00,000
PMT 0
FV = value as in 2013 ? (Solve = 60,34,392.25)
P/Y & C/Y 1,1 (respectively)

WNo. 4:- Calculation of depreciation reserves for premises

Particulars Amount (INR)
Cost of premises (as in 2007) 1,60,00,000
(-) Residual value for premises (WNo. 3) (60,34,392.25)
Depreciation reserves 99,65,607.75
WNo. 5:- Calculation of residual value for plant

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Particulars Amount (INR)

Set Begin
N = 2013 – 2008 5
I% = depreciation rate -15
PV = cost in 2008 - 2,00,00,000
PMT 0
FV = value as in 2013 ? (Solve = 88,74,106.25)
P/Y & C/Y 1,1 (respectively)

WNo. 6:- Calculation of depreciation reserves for plant

Particulars Amount (INR)
Cost of plant (as in 2008) 2,00,00,000
(-) Residual value for premises (WNo. 5) (88,74,106.25)
Depreciation reserves 1,11,25,893.75

Method 2:-
We know that: -
• Cost – Depreciation = Residual Value
• Therefore, Cost = Depreciation + Residual Value
So,
• Additional Reserves = Reinstatement Value – Cost
• Therefore Additional Reserves = 6,05,55,176 (-) 3,60,00,000 = 2,45,55,176

38) Mr. A had taken a loan of Rs. 40,00,000 in July 2010 at a floating rate of interest of 10% p.a. for a
tenure of 20 years from a housing finance company. The company sent a notice raising the interest
rate to 10.75% p.a. effective January 2012, thus increasing the EMI. He decides to refinance the loan
at 10.25% p.a. from a bank, which charges a processing fee of 1% of loan sanctioned. What absolute
amount he stands to save, in the remaining tenure, if the outstanding loan amount, at the end of March
2012 is refinanced, so that, the new loan terminates as per original tenure? (Exam problem – 4
marks)

Ans:-

Calculation of amount saved on account of refinancing

Particulars Amount (INR)
Total cash outflow (if no refinancing would have taken place) (WNo. 7) 88,72,907.509
(-) Total cash outflow (on account of refinancing) (WNo. 1- 6) (86,33,506.678)
Excess cash outflow, if no refinancing would have taken place (i.e. Amount 2,39,400.8306
saved on account of refinancing)

WNo. 1:- Calculation of EMI

Particulars Amount (INR)
Set End
N = no. of payment periods 20 x 12 = 240
I% 10
PV (2010) 40,00,000
PMT = EMI ? (Solve = -38,600.8658)
FV 0
P/Y & C/Y 12,12 (respectively)

WNo. 2:- Total months for which the loan was paid at an interest rate of 10% p.a.

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Year No. of months in the year

2010 (July – December) 6
2011 12
Total 18

WNo. 3:- Calculation of outstanding loan amount as on 1st Jan, 2012 – when interest rate was
changed (AMRT function)
Particulars Amount (INR)
Set End
PM1 1
PM2 (WNo. 2) 18
N = no. of payment periods 20 x 12 = 240
I% 10
PV (2010) 40,00,000
PMT = EMI -38,600.8658
FV 0
P/Y & C/Y 12,12 (respectively)
Bal = Solve 38,98,160.269

WNo. 4:- Calculation of New EMI as on 1st Jan, 2012 – when interest rate was changed to 10.75%
Particulars Amount (INR)
Set End
N = no. of payment periods 240 – 18 = 222
I% 10.75
PV (2012) (WNo. 3) 38,98,160.269
PMT = EMI ? (Solve = -40,515.5594)
FV 0
P/Y & C/Y 12,12 (respectively)

WNo. 4:- Calculation of outstanding loan amount as on 31st Mar, 2012 – when the loan was
refinanced (AMRT function)
Particulars Amount (INR)
Set End
PM1 1
PM2 (Jan, Feb, Mar) 3
N = no. of payment periods 222
I% 10.75
PV (2012) 38,98,160.269
PMT = EMI -40,515.5594
FV 0
P/Y & C/Y 12,12 (respectively)
Bal = Solve 38,81,225.846

WNo. 5:- Calculation of New EMI after the loan was refinanced at 10.25% p.a.
Particulars Amount (INR)

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Set End
N = no. of payment periods 222 – 3 = 219
I% 10.25
PV (2012) (WNo. 4) 38,81,225.846
PMT = EMI ? (Solve = - 39,245.18)
FV 0
P/Y & C/Y 12,12 (respectively)

WNo. 6:- Total cash outflow on account of refinancing

Particulars Amount (INR)
Total EMI payments = 219 x Rs. 39,245.18 85,94,694.42
(+) Processing fee on the loan refinanced 38,812.25846
(38,81,225.846 x 1%)
Total cash outflow on account of refinancing 86,33,506.678

WNo. 7:- Total cash outflow if no refinancing would have taken place
Particulars Amount (INR)
Total EMI payments = 219 x Rs. 40,515.5594 88,72,907.509
(WNo. 4)

Annuity - Return of Purchase Price:-

39) An executive purchased an annuity for a lumpsum of Rs. 85,00,000, when he was 53 years & had
in dependants a non-working spouse of age 48 & son of age 25. On reaching age 60, he expects atleast
one, himself or his spouse, to survive till 85 years and contracts an immediate life annuity with return
of purchase price at Rs. 10,15,000 per annum, vested against a purchase price of Rs. 1,61,00,000.
What return is expected from the vesting date? (Exam problem – 4 marks)

Ans: -

Calculation of return expected from the vesting date (i.e. age 60)
Particulars Amount (INR)
Set Begin
N = Life expectancy of surviving spouse 85 – 55 = 30
I% ? (Solve =6.728538283)
PV (60) = Purchase of annuity - 1,61,00,000
PMT = Annuity received every year 10,15,000
FV(85) = Return of purchase price of annuity 1,61,00,000
P/Y & C/Y 1,1 (respectively)

Notes:-
• They have asked us to calculate the return of the annuity from the vested date (i.e. age 60). So
annuity purchased for a lumpsum of Rs. 85,00,000 when the executive was 53 years old is to
be ignored.

Paid Up Value (Non forfeiture clause) & Surrender Value:-

40) Sum Assured Rs. 40,000. Plan & term of endowment is 20 years. Date of commencement (DOC)
is 1st Jan, 1995 & last unpaid premium (LUP) is 1st Jan, 1998. The life assured pays the premiums
quarterly. What is the paid up value?

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Ans: -
• Paid up Value = [(No. of premiums paid / Total no. of premiums) x Sum Assured] + Bonus
• Total no. of premiums paid (premiums are paid on quarterly basis):-
o 1995 = 4
o 1996 = 4
o 1997 = 4
• Therefore, total premiums paid = 12
• Total no. of premiums = 20 years x 4 = 80
• Therefore PUV = [(12/80) x 40,000] + Bonus = Rs. 600

41) Mr. X has 25 years endowment policy, the annual premium being Rs. 15,850 for a sum assured of
Rs. 12,00,000. He has paid 18 premiums & has Rs. 6,50,000 as declared bonuses on this policy. He
has met his objectives & has sufficient cover & wealth support. He does not wish to continue in the
policy. He has the option either to make the policy paid up, or surrender the same at a factor of 75%
of the paid up value. If he chooses to surrender, what return he should earn on the surrender value to
offset the paid up value, when due? (Exam problem – 3 marks)

Ans:-

Calculation of Paid Up Value (Yr. 25) Calculation of Surrender Value (Yr. 18)
Particulars Amount Particulars Amount (INR)
(INR) Paid up value 15,14,000
No. of premiums paid (a) 18 (x) SV Factor (x) 75%
Total no of premiums (b) 25 Surrender Value 11,35,500
Sum Assured (c) 12,00,000
Bonus (d) 6,50,000
Paid Up Value (e) = [(a/b) x c ] + d 15,14,000

Calculation of return Mr. X would earn on the surrender value to offset the paid up value
Particulars Amount (INR)
Set Begin
N = 25 – 18 7
I% ? (Solve = 4.195362744)
PV(18) = Surrender Value -11,35,500
PMT 0
FV(25) = Paid Up Value 15,14,000
P/Y & C/Y 1,1 (respectively)

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 Risk Analysis & Insurance Planning (RAIP) – Faculty Copy (Financial Planning Academy)

Policy comparison:-
42) A 40 year old male individual can get a 15 year with profit life insurance policy of a company at
an annual premium of Rs. 12,046 which gives a sum assured of Rs. 1,50,000. The company
historically has declared revisionary bonuses & terminal bonuses, per thousand, sum assured at Rs. 35
& Rs. 80 respectively. A term plan with the same, life & other parameters is generally available for an
annual premium of Rs. 3,565. Find the return on investment component of the company’s policy on
surviving the term (Exam problem – 4 marks)

Ans:-

Policy comparison
Particulars Term With profit Excess payment Amount received on
Insurance policy under with maturity in case of
profit policy with profit policy
Sum Assured 1,50,000 1,50,000 Nil 1,50,000
Premiums paid - 3,565 - 12,046 - 8481
Bonus:-
Revisionary Bonus Nil 78,750 78,750
(35/1000) x
1,50,000 x 15 yrs
Terminal Bonus 12,000 12,000
(80/1000) x
1,50,000
Total 2,40,750

Calculation of the return on investment component of the company’s policy on surviving the term
Particulars Amount (INR)
Set Begin
N 15
I% ? (Solve = 7.626425224)
PV 0
PMT = excess premium paid -8481
FV = maturity proceeds 2,40,750
P/Y & C/Y 1

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