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Formula sheet/NISM Series X-B: Investment Adviser (Level 2)/Risk Management and Insurance Planning
[ RISK MANAGEMENT AND INSURANCE PLANNING ]

Human Life Value (HLV) & Needs-Based Life Insurance Sizing

Real Discount Rate:rreal=[(1+rinv)/(1+rinf)]−1\text{Real Discount Rate}: r_{\text{real}} = [ (1 + r_{\text{inv}}) / (1 + r_{\text{inf}}) ] - 1
HLV Method(Income Capitalization):HLV=Annual Earning Contribution×[1−(1+rreal)−n/rreal]\text{HLV Method} (\text{Income Capitalization}): HLV = \text{Annual Earning Contribution} \times [ { 1 - (1 + r_{\text{real}})^{-n} } / r_{\text{real}} ]
Excel: =PV(r_real, n, -Income)
Special Case:If rinv=rinf  ⇒  rreal=0  ⇒  HLV=Annual Earning Contribution×n\text{Special Case}: \text{If r}_{\text{inv}} = r_{\text{inf}} \;\Rightarrow\; r_{\text{real}} = 0 \;\Rightarrow\; HLV = \text{Annual Earning Contribution} \times n
Needs-Based Approach:Additional Life Cover=PV of Family Living Expenses+Outstanding Loans+Future Goals−Existing Financial Assets−Existing Life Cover\text{Needs-Based Approach}: \text{Additional Life Cover} = \text{PV of Family Living Expenses} + \text{Outstanding Loans} + \text{Future Goals} - \text{Existing Financial Assets} - \text{Existing Life Cover}
Variables

rinvr_{\text{inv}}: Post-tax investment return; rinfr_{\text{inf}}: Inflation rate; n: Years to retirement.

Exam note

HLV measures economic earning capacity. Needs-based sizing accounts for actual household liabilities and available liquid wealth.

Worked examples
Human Life Value (HLV) Calculation using Real Discount Rate

A 33-year-old software architect earns an annual income of Rs 10,00,000 dedicated to family support and plans to retire at age 60 (27 working years left). The expected investment return on capital is 8.0% p.a., and expected long-term inflation is 6.0% p.a. Compute the Real Discount Rate and Human Life Value (HLV).

Needs-Based Life Insurance Sizing with Existing Debt & Assets

A 45-year-old individual provides for his 40-year-old wife (life expectancy 80 years, 40 years to provide for). Current annual family living expenses are Rs 6,00,000. Expected investment return is 8.0%, inflation is 6.0% (Real Rate = 1.8868%). The client has an outstanding home loan of Rs 30,00,000, existing term life cover of Rs 50,00,000, and liquid financial assets of Rs 20,00,000. Calculate additional life insurance required.

Inherent Return on Endowment & Return of Premium (ROP) Plans

A 30-year-old is considering a 20-year Return of Premium (ROP) Term Plan with Sum Assured of Rs 1.00 Crore. Annual premium for pure term plan = Rs 12,000; Annual premium for ROP plan = Rs 32,000 (Extra premium = Rs 20,000/yr). At maturity (Year 20), the ROP plan returns all premiums paid (20 × Rs 32,000 = Rs 6,40,000). Calculate the internal rate of return (IRR) earned on the extra premium.

Paid-Up Sum Assured on Lapsed Traditional Life Policy

An insured bought a 20-year traditional endowment policy with Sum Assured of Rs 10,00,000 and annual premium of Rs 50,000. After paying 6 annual premiums, he is unable to pay further premiums and converts the policy into a Paid-Up policy. If the insurer has accrued bonuses of Rs 80,000 over the 6 years, calculate the Paid-Up Value payable on death or maturity.

Top-Up vs. Super Top-Up Health Policy Claim Settlement

An insured holds a Base Health Policy of Rs 3 Lakhs and a secondary policy of Rs 10 Lakhs with a Rs 3 Lakh Deductible. During the year, she incurs 3 hospital claims: Claim 1 = Rs 2 Lakh, Claim 2 = Rs 3 Lakh, Claim 3 = Rs 4 Lakh (Total = Rs 9 Lakhs). Calculate total reimbursement and out-of-pocket expenses under: (Case A) Top-Up Policy, (Case B) Super Top-Up Policy.