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Archive / Investment Adviser (Level 2) / Life Insurance Products
nism-series-xb-needs-based-life-insurance-formula-components[ INVESTMENT ADVISER (LEVEL 2) ]

In the Needs-Based Life Insurance Planning approach (as applied in Adil's Case), what is the correct mathematical formula to determine 'New Additional Life Insurance Required'?

[ A ][Present Value of Family Living Expenses over Dependency Period] + [Outstanding Loans & Debt Liabilities] + [Future Capital Goals like Child Corpus] - [Existing Liquid Investments] - [Existing Life Insurance Cover][ CORRECT ]
[ B ]Gross Annual Salary * Current Age
[ C ]Total Assets * 10% Flat
[ D ]Outstanding Home Loan EMI * 12
Takeaway

The correct Needs-Based formula is the present value of family living expenses plus loans and future capital goals, minus existing investments and existing life insurance, so option A is correct.

Derivation
The Needs-Based method sums three funding requirements — the PV of ongoing family living expenses over the dependency period, outstanding loans and debt liabilities, and earmarked future capital goals such as a child's education corpus — and then subtracts two existing resources: liquid investments already available and the life insurance cover already in force. This nets down to the additional cover truly required. This formula structure is exactly what was applied step-by-step in Adil's case elsewhere in this set, and the question tests whether candidates can recognise and articulate the general formula independent of any specific numbers.
Why the others fail
B — Gross Annual Salary * Current Age
Multiplying gross annual salary by current age is an arbitrary calculation with no basis in actuarial or financial planning methodology.
C — Total Assets * 10% Flat
A flat 10% of total assets fails to evaluate actual family expense replacement needs or outstanding debt obligations in any meaningful way.
D — Outstanding Home Loan EMI * 12
Annual EMI multiplied by 12 covers only one year of loan servicing and entirely ignores family living expenses and the total outstanding loan principal.