Needs analysis for life insurance

Knowing the needs-based approach in theory is one thing. Chapter 20's case studies exist to make sure a candidate can actually run the numbers under exam pressure, with a real client's figures.

The shape of the calculation never changes: find the corpus needed to replace lost income or expenses, add any specific lump-sum needs, subtract cover already in force, and the remainder is the answer. What changes from case to case is which pieces apply and what rates the question gives you.

Charu's case, worked in full: she is 35, earns Rs 50,000 a month, plans to work till 60, which is 25 years left, assumes 6% inflation and 10% investment returns, and already holds Rs 40,00,000 of cover.

Current annual income (50,000 x 12)              Rs   6,00,000
Inflation-adjusted return [(1.10/1.06)-1]                 3.77%
Corpus required, PV(3.77%, 25, -6,00,000)        Rs  96,01,652
Less existing cover                              Rs  40,00,000
Additional cover required                        Rs  56,01,652

The mechanics are identical to Adil's case under the needs-based approach: an income or expense stream is converted to a present value using an inflation-adjusted discount rate and the PV function, specific lump sums such as debts or a child's corpus are added separately, and existing cover is subtracted at the very end. The workbook rounds Charu's answer to Rs 56 lakh among its multiple-choice options.

Using Charu's figures above, the inflation-adjusted rate is what turns a flat Rs 6,00,000-a-year income stream, growing with inflation, into a single lump sum today. PV(3.77%, 25, -6,00,000) gives roughly Rs 96,01,652, the corpus that, invested at 10% while her income need grows at 6%, would sustain Rs 6,00,000 a year, rising with inflation, for 25 years.

Subtracting her existing Rs 40,00,000 cover leaves Rs 56,01,652 of additional insurance needed, the answer the workbook confirms as Rs 56 lakh among its choices. A candidate who forgets to subtract existing cover would instead answer close to Rs 96 lakh, a common wrong-answer trap the case is built to catch.

Chapter 20 (Case Studies), Practice Cases with Solutions, Questions 1, Adil, and 3, Charu, both apply the needs-based approach with the PV Excel function and an inflation-adjusted discount rate. Expect a full numerical question of this shape, with income, inflation, investment return, term and existing cover all given, and the answer expected as the additional cover required.

• Subtract existing cover at the very end, not before computing the present value. The corpus calculation is on the gross need.
• The discount rate is inflation-adjusted: (1 plus investment return) divided by (1 plus inflation) minus 1, not the raw investment return by itself.
• PMT is entered as a negative number in the Excel PV convention used throughout the workbook. Get the sign wrong and the answer comes out negative or wildly different.
• Years of employment left, not life expectancy, sets the term for an income-replacement calculation. Charu's term is 25 years, 60 minus 35, not her expected lifespan.