NISM Series X-B Chapter 19: Comparison of Products across Categories Practice Questions

Question 1

L has bequeathed her house to her son through a registered Will. Her son now wants to use this Will to prove future ownership and secure a loan with the house as collateral while L is still alive. Is this a valid position?

Accepted Answer

No, because the provisions of a Will only come into effect upon the demise of the testator.. As stated in the chapter text's hint for Question 10, Part 2, a Will comes into effect only on the death of the testator and can be changed by them before their death. Therefore, during L's lifetime, her son has no legal ownership rights to the house based solely on the Will, and thus cannot use it as collateral

Question 2

Fahad has a base health policy of Rs.3 lakhs and a Super Top-up policy of Rs.10 lakhs with a Rs.3 lakhs deductible. During the year, he incurs multiple medical expenditures of Rs.2 lakhs, Rs.3 lakhs, and Rs.4 lakhs. How much of the total expense will Fahad have to bear out of his pocket?

Accepted Answer

NIL. Medical Expense 1: Rs.2 lakhs. Base policy covers Rs.2 lakhs. (Remaining base: Rs.1 lakh)
Medical Expense 2: Rs.3 lakhs. Base policy covers Rs.1 lakh. Super Top-up deductible of Rs.3 lakhs is now met (Rs.2 lakhs from ME1 + Rs.1 lakh from ME2). Super Top-up covers the remaining Rs.2 lakhs. (Remaining base: NIL, Super Top-up used: Rs.2 lakhs)
Medical Expense 3: Rs.4 lakhs. Base policy is exhausted. Super Top-up is active (deductible met) and covers Rs.4 lakhs. (Super Top-up used: Rs.2 lakhs + Rs.4 lakhs = Rs.6 lakhs)
Total out-of-pocket expense = NIL

Question 3

Fahad has a base health policy of Rs.3 lakhs and a Super Top-up policy of Rs.10 lakhs with a Rs.3 lakhs deductible. He has to meet multiple medical expenditures of Rs.2 lakh, Rs.3 lakhs, and Rs.4 lakhs during the year. How much of the expense will he have to bear out of his pocket?

Accepted Answer

NIL. Base policy: Rs.3 lakhs. Super Top-up: Rs.10 lakhs with Rs.3 lakhs deductible.
1.  **First medical expense (Rs.2 lakhs):** Base policy covers Rs.2 lakhs. Remaining base policy cover: Rs.3 lakhs - Rs.2 lakhs = Rs.1 lakh. Out of pocket: NIL. Cumulative expense covered by base: Rs.2 lakhs.
2.  **Second medical expense (Rs.3 lakhs):** Base policy covers the remaining Rs.1 lakh. The Super Top-up deductible of Rs.3 lakhs is now met by the cumulative base policy payouts (Rs.2 lakhs + Rs.1 lakh = Rs.3 lakhs). The Super Top-up policy covers the remaining Rs.2 lakhs of this expense (Rs.3 lakhs - Rs.1 lakh from base). Out of pocket: NIL.
3.  **Third medical expense (Rs.4 lakhs):** Base policy is exhausted. The Super Top-up deductible has already been met. The Super Top-up policy covers the entire Rs.4 lakhs. Out of pocket: NIL.
Total out of pocket expense = NIL

Question 4

Rohan, aged 30, earns an annual income of Rs.7,20,000 and expects to work until 60. He anticipates an inflation rate of 5% and expects long-term investment returns of 9%. If Rohan currently has a life insurance cover of Rs.50 lakhs, how much additional life insurance should he acquire to cover his family's income needs throughout his working life?

Accepted Answer

Rs.83 lakhs. 1. Current Annual Income: Rs.7,20,000
2. Years of employment left: 60 - 30 = 30 years
3. Inflation rate: 5%
4. Return expected on investments: 9%
5. Inflation adjusted returns = [((1 + Investment Return) / (1 + Inflation Rate)) - 1] = [(1 + 0.09) / (1 + 0.05)] - 1 = (1.09 / 1.05) - 1 = 1.038095 - 1 = 0.038095 or 3.81%.
6. Corpus required (Present Value of future income stream) = PV(Rate, Nper, Pmt) = PV(3.8095%, 30, -720000) = Rs.1,33,39,010.51.
7. Insurance cover available: Rs.50,00,000.
8. Additional insurance cover required = Corpus required - Insurance cover available = Rs.1,33,39,010.51 - Rs.50,00,000 = Rs.83,39,010.51

Question 5

What is the primary difference in how the deductible applies between a standard Top-up health insurance policy and a Super Top-up health insurance policy, particularly when multiple medical expenditures occur within the same policy year?

Accepted Answer

A Top-up policy's deductible applies per claim, while a Super Top-up policy's deductible is aggregate for the policy year.. As demonstrated in the chapter text (Questions 5 and 6), a standard Top-up policy applies its deductible to each individual claim, meaning the deductible must be met for every separate hospitalisation or medical incidence. In contrast, a Super Top-up policy's deductible is aggregate, meaning it needs to be met only once in a policy year, after which the Super Top-up sum assured becomes available for subsequent claims (either from the base policy or out-of-pocket expenses combined) once the aggregate deductible is crossed

Question 6

Dhruv has a base health policy of Rs.3 lakhs and a Top-up policy of Rs.10 lakhs with a Rs.5 lakh deductible. He has to meet medical expenditure of Rs.4 lakhs. How much of the expense will he have to bear out of his pocket?

Accepted Answer

Rs.1 lakh. Medical expense: Rs.4 lakhs.
1. Base policy covers: Rs.3 lakhs.
2. Remaining expense: Rs.4 lakhs - Rs.3 lakhs = Rs.1 lakh.
3. Top-up policy has a deductible of Rs.5 lakhs. Since the remaining expense of Rs.1 lakh is less than the deductible, the Top-up policy will not cover any amount.
Therefore, Dhruv will have to bear Rs.1 lakh out of his pocket

Question 7

Jaspreet, 40 years old, currently requires Rs. 50,000 per month for living expenses. He plans to retire at 60, expecting his expenses to remain at the same inflation-adjusted level. He wants to fund 25 years of retirement. Assuming an inflation rate of 8% and investment returns of 9% during retirement, what corpus is required at the start of his retirement to provide the necessary income?

Accepted Answer

Rs. 6.2 crores. Current Annual Expenses: Rs. 50,000 * 12 = Rs. 6,00,000
Period to retirement: 60 - 40 = 20 years
Future value of living expenses at retirement (FV function in Excel: FV(Rate, Nper, , PV)): =FV(8%, 20, , -600000) = Rs. 27,96,574.29
Investment return expected from corpus in retirement: 9%
Inflation adjusted return: [((1 + 9%) / (1 + 8%)) - 1] = (1.09 / 1.08) - 1 = 0.009259259 or 0.93%
Corpus required to generate retirement income (PV function in Excel: PV(Rate, Nper, Pmt)): =PV(0.93%, 25, -2796574.29) = Rs. 6,21,56,919.33
Rounded to the nearest crore, this is Rs. 6.2 crores

Question 8

L wants to create a corpus for her five-year-old grandchild's college education. Given this goal, which of the following investment funds would be best suited for L, irrespective of her own age?

Accepted Answer

A large and mid-cap equity fund, considering the long investment horizon.. As per the hint for Question 10, Part 1, 'Since the goal has a long term to funding, L can take equity exposure irrespective of her age.' A five-year-old grandchild's college education is a long-term goal (typically 13+ years away), making equity-oriented funds like large and mid-cap funds suitable for potential capital appreciation over the long horizon, despite the investor's (L's) age

Question 9

L, in her late 60s, is saving a portion of her pension to create a corpus for her five-year-old grandchild's college education. Considering the long-term nature of this goal, which of the following funds would be best suited for L?

Accepted Answer

A large and mid-cap fund, since there is a long period before the goal has to be funded.. Since the goal (grandchild's college education) has a long period before it needs to be funded (the grandchild is five years old), L can afford to take equity exposure irrespective of her age to potentially achieve higher growth. A large and mid-cap fund offers such exposure

Question 10

Jaspreet is 40 years old and currently requires Rs. 50,000 pm to meet living expenses. She wants to retire at the age of 60 and expects her expenses to be at the same level, adjusted for inflation. She wants to know what corpus is required to provide the retirement income for 25 years. She sees inflation at 8% and investment returns in retirement at 9%.

Accepted Answer

Rs. 6.2 crores. Current Annual Expenses: Rs. 50,000 * 12 = Rs. 6,00,000
Period to retirement: 60 - 40 = 20 years
Future value of living expenses at retirement (FV of current expenses with inflation):
FV(Rate=8%, Nper=20, PV=-600000) = Rs. 27,96,574.29

Investment return expected from corpus in retirement: 9%
Inflation adjusted return in retirement: [((1 + 0.09) / (1 + 0.08))] - 1 = (1.09 / 1.08) - 1 = 0.009259 or 0.93%
Number of years in retirement to provide for: 25 years

Corpus required to generate retirement income (PV of an annuity):
PV(Rate=0.93%, Nper=25, Pmt=-2796574.29) = Rs. 6,21,56,919.33
Rounded to Rs. 6.2 crores

Question 11

Fahad has a base health policy of Rs. 3 lakhs and a Super Top-up policy of Rs. 10 lakhs with a Rs. 3 lakhs deductible. During the year, he incurs multiple medical expenditures: Rs. 2 lakh, Rs. 3 lakhs, and Rs. 4 lakhs. How much of the total expense will Fahad have to bear out of his pocket?

Accepted Answer

NIL. 1. First Medical Expense (Rs. 2 lakhs):
   - Base policy covers: Rs. 2 lakhs
   - Remaining Base policy: Rs. 3 lakhs - Rs. 2 lakhs = Rs. 1 lakh
   - Out of pocket: NIL

2. Second Medical Expense (Rs. 3 lakhs):
   - Base policy covers: Rs. 1 lakh (remaining base policy)
   - Super Top-up deductible met by base policy over two incidents: Rs. 2 lakhs (from 1st) + Rs. 1 lakh (from 2nd) = Rs. 3 lakhs. The deductible is now met.
   - Super Top-up covers: Rs. 2 lakhs (Rs. 3 lakhs total expense - Rs. 1 lakh covered by base)
   - Out of pocket: NIL

3. Third Medical Expense (Rs. 4 lakhs):
   - Base policy: Exhausted (Rs. 3 lakhs already used)
   - Super Top-up deductible: Already met in previous incidents.
   - Super Top-up covers: Rs. 4 lakhs
   - Out of pocket: NIL

Total out of pocket expense: NIL

Question 12

Harish is 40 years old and intends to retire at the age of 55. His retirement corpus has a balance of Rs. 15 lakhs at the end of the current year. His monthly contributions (self and employer) amount to Rs. 10,000, expected to grow by 10% each year. The retirement corpus is invested in debt and is expected to earn a return of 8% p.a. What will be the balance that Harish will have in the retirement corpus when he retires?

Accepted Answer

Rs. 1.14 crores. This question requires a year-by-year calculation as provided in the chapter text:

Age | Contribution* (Rs.) | Returns earned# (Rs.) | Balance@ (Rs.)
---|-------------------|---------------------|--------------------
40 | -                 | -                   | 15,00,000
41 | 1,20,000          | 1,20,000            | 17,40,000 (Note: The provided text's table shows 1,32,000 for contribution and 17,52,000 for balance, implying the 10% growth starts from the first year listed. Following the provided table's exact values)
...
55 | 5,01,269.7803     | 8,06,704.1226       | 1,13,91,775.4

Following the exact table from the provided solution, the balance at age 55 is Rs. 1,13,91,775.4, which rounds to Rs. 1.14 crores

Question 13

L has bequeathed her financial investments in mutual funds to her daughter through a Will. If L's daughter has an immediate need for money to meet an emergency while L is still alive, which of the following actions would enable her to access the money L has intended for her to have?

Accepted Answer

L can make a gift to her daughter of the required sum of money after redeeming the mutual funds.. A Will comes into effect only on L's death. For immediate access while L is alive, L, as the primary holder of the mutual fund, must redeem the investment. The proceeds can then be gifted to her daughter. Gifts to certain relatives, including children, are typically tax-free for the recipient

Question 14

Charu, aged 35, earns a monthly income of Rs. 50,000 and expects to work until age 60. She anticipates inflation at 6% and long-term investment returns at 10%. With an existing insurance cover of Rs. 40 lakhs, how much additional life insurance should Charu acquire to ensure her family continues to receive her income throughout her working life?

Accepted Answer

Rs. 56 lakhs. Current Annual Income: Rs. 50,000 * 12 = Rs. 6,00,000
Years of employment left: 60 - 35 = 25 years
Inflation adjusted returns: [(1 + 10%) / (1 + 6%)] - 1 = (1.10 / 1.06) - 1 = 0.037735849 or 3.77%
Corpus required (PV function in Excel: PV(Rate, Nper, Pmt)): =PV(3.77%, 25, -600000) = Rs. 96,01,652.38
Insurance cover available: Rs. 40,00,000
Additional insurance cover required: Rs. 96,01,652.38 - Rs. 40,00,000 = Rs. 56,01,652.38
Rounded to the nearest lakh, this is Rs. 56 lakhs

Question 15

L has executed and registered a Will, bequeathing her house to her son. Her son intends to take a loan using the house as security and presents L's registered Will as proof of his future ownership of the property. Is this a valid position for securing the loan?

Accepted Answer

No, since the provisions of the Will apply only on L's demise.. A Will comes into effect only upon the demise of the person who made it and can be changed by the person before their death. Therefore, the son cannot use the Will as proof of current ownership or for securing a loan while L is still alive

Question 16

Mrs. Sharma has registered her Will, bequeathing her commercial property to her son. Her son wishes to use this Will as proof of future ownership to secure a business loan while Mrs. Sharma is still alive. Is this a valid approach?

Accepted Answer

No, as a Will only becomes legally effective upon the demise of the testatrix.. A Will is a testamentary document that specifies the distribution of assets after the demise of the testator. It does not confer any ownership rights or legal effect during the testator's lifetime and can be changed by the testator at any point before their death

Question 17

Charu is 35 years old and aims to work until 60. She earns Rs.50,000 monthly, with inflation at 6% and long-term investment returns at 10%. If she currently has an insurance cover of Rs.40 lakhs, how much *additional* life insurance should she take to ensure her family receives her equivalent income for her working life?

Accepted Answer

Rs.56 lakhs. Current Annual Income (Rs.50000*12) = Rs.6,00,000
Rate at which income will grow each year (Inflation rate) = 6%
Years of employment left = 25 years
Return expected on investments = 10%
Inflation adjusted returns = [(1+10%)/(1+6%)-1] = 3.77%
Corpus required (A) = PV(3.77%,25,-600000) = Rs.96,01,652.38
Insurance cover available (B) = Rs.40,00,000
Insurance cover required (A-B) = Rs.56,01,652.38 (approx. Rs.56 lakhs)

Question 18

A person has a base health policy of Rs. 2.5 lakhs and a Top-up policy of Rs. 7 lakhs with a Rs. 4 lakh deductible. If they incur a single medical expense of Rs. 3.8 lakhs, how much will they have to bear out of their pocket?

Accepted Answer

Rs. 1.3 lakhs. Medical expense: Rs. 3.8 lakhs
Base policy will cover: Rs. 2.5 lakhs
Remaining expense: Rs. 3.8 lakhs - Rs. 2.5 lakhs = Rs. 1.3 lakhs
Top-up policy has a deductible of Rs. 4 lakhs. Since the remaining expense (Rs. 1.3 lakhs) is less than the deductible, the top-up policy will not contribute.
Therefore, the portion of expense to be borne out of pocket is Rs. 1.3 lakhs

Question 19

Esther has base health policy of Rs.3 lakhs and a Top-up policy of Rs.10 lakhs with Rs.5 lakh deductible. She has to meet multiple medical expenditures of Rs.2 lakh, Rs.3 lakhs, and Rs.4 lakhs during the year. How much of the expense will she have to bear out of her pocket?

Accepted Answer

Rs.6 lakhs. A Top-up policy's deductible applies to each individual claim or hospitalization event, not cumulatively over the year.

1.  **First Medical Expense: Rs. 2 lakhs**
    *   Base policy covers: Rs. 2 lakhs.
    *   Amount out of pocket: NIL.
    *   Remaining base policy cover: Rs. 3 lakhs - Rs. 2 lakhs = Rs. 1 lakh.

2.  **Second Medical Expense: Rs. 3 lakhs**
    *   Base policy covers: Rs. 1 lakh (remaining cover).
    *   Remaining expense after base policy: Rs. 3 lakhs - Rs. 1 lakh = Rs. 2 lakhs.
    *   Top-up deductible: Rs. 5 lakhs. Since the remaining expense (Rs. 2 lakhs) is less than the deductible, the top-up policy does not activate.
    *   Amount out of pocket for this claim: Rs. 2 lakhs.
    *   Remaining base policy cover: Rs. 0.

3.  **Third Medical Expense: Rs. 4 lakhs**
    *   Base policy covers: Rs. 0 (already exhausted).
    *   Remaining expense: Rs. 4 lakhs.
    *   Top-up deductible: Rs. 5 lakhs. Since the remaining expense (Rs. 4 lakhs) is less than the deductible, the top-up policy does not activate.
    *   Amount out of pocket for this claim: Rs. 4 lakhs.

Total out of pocket expense = Rs. 0 (1st) + Rs. 2 lakhs (2nd) + Rs. 4 lakhs (3rd) = Rs. 6 lakhs

Question 20

Charu, aged 35, earns a monthly income of Rs.50,000 and plans to work until 60. She aims to ensure her family has an equivalent income if she were to pass away. Assuming an inflation rate of 6% and long-term investment returns of 10%, and with an existing life insurance cover of Rs.40 lakhs, how much additional life insurance should she acquire to meet her family's income needs for her remaining working life?

Accepted Answer

Rs.56 lakhs. 1. Current Annual Income: Rs. 50,000 * 12 = Rs. 6,00,000
2. Years of employment left: 60 - 35 = 25 years
3. Inflation-adjusted return: [(1 + Investment Return) / (1 + Inflation Rate)] - 1 = [(1 + 0.10) / (1 + 0.06)] - 1 = (1.10 / 1.06) - 1 = 0.0377358 or 3.77%
4. Corpus required (Present Value of future income stream): Using the PV function (Rate=3.77%, Nper=25, Pmt=-600000) = Rs. 96,01,652.38
5. Additional insurance required: Rs. 96,01,652.38 (Corpus required) - Rs. 40,00,000 (Existing cover) = Rs. 56,01,652.38
Rounded to Rs. 56 lakhs

Question 21

Giri's insured property suffered damage, leading to a claim of Rs.50,000. His policy includes a deductible of Rs.10,000 and a co-pay of 5%. What amount will the insurance company reimburse Giri?

Accepted Answer

Rs.38,000. 1. Claim Amount = Rs. 50,000
2. Amount after deductible = Claim Amount - Deductible = Rs. 50,000 - Rs. 10,000 = Rs. 40,000
3. Co-pay amount = 5% of (Amount after deductible) = 5% of Rs. 40,000 = Rs. 2,000
4. Reimbursement = Amount after deductible - Co-pay amount = Rs. 40,000 - Rs. 2,000 = Rs. 38,000

Question 22

L has bequeathed her house to her son in a registered Will. Her son wants to take a loan using the house as security, presenting L's Will to prove his future ownership. Is this a valid position for the son to obtain a loan?

Accepted Answer

No, since the provisions of the Will apply only on L's demise.. A Will comes into effect only on the demise of the person who made it. Until L's death, she remains the legal owner of the house and can even change her Will. Therefore, the son cannot use the Will to prove current ownership for a loan

Question 23

L's son wants to take a loan with the house bequeathed to him in L's Will as security, presenting the registered Will as proof of future ownership. Is this a valid position for obtaining the loan?

Accepted Answer

No, since the provisions of the Will apply only upon L's demise and can be changed before her death.. A Will is a legal document that takes effect only upon the death of the person who made it (the testator). Until L's demise, the property remains under her ownership, and she retains the right to modify or revoke the Will at any time. Therefore, the son cannot use the Will as proof of ownership or security for a loan while L is alive

Question 24

L, in her late 60s, wants to create a corpus for her five-year-old grandchild's college education. Considering the long period before the goal needs to be funded, which of the following funds would be best suited for this purpose, irrespective of L's age?

Accepted Answer

A large and mid-cap fund, since there is a long period before the goal has to be funded.. Since the goal has a long term to funding (grandchild is 5 years old, college education is typically 18+ years away), L can take equity exposure irrespective of her age. A large and mid-cap fund offers potential for significant growth over such a long horizon

Question 25

Jaspreet is 40 years old and currently requires Rs.50,000 pm to meet living expenses. He wants to retire at the age of 60 and expects his expenses to be at the same level, adjusted for inflation. He wants to know what corpus is required to provide the retirement income for 25 years. He sees inflation at 8% and investment returns in retirement at 9%.

Accepted Answer

Rs.6.2 crores. 1.  **Current Annual Expenses:** Rs.50,000 * 12 = Rs.6,00,000
2.  **Future Value of Living Expenses at Retirement (Age 60):**
    *   Years to retirement: 60 - 40 = 20 years
    *   Inflation rate: 8%
    *   FV = PV * (1 + Rate)^Nper = Rs.6,00,000 * (1 + 0.08)^20 = Rs.6,00,000 * 4.660957 = Rs.27,96,574.29
3.  **Inflation-Adjusted Return in Retirement:**
    *   Investment return: 9%
    *   Inflation: 8%
    *   Inflation-adjusted return = [((1 + Investment Return) / (1 + Inflation)) - 1] = [((1 + 0.09) / (1 + 0.08)) - 1] = [1.09 / 1.08 - 1] = 0.009259 or approx. 0.93%
4.  **Corpus Required to Generate Retirement Income (PV of annuity):**
    *   Annual income needed at retirement: Rs.27,96,574.29
    *   Years in retirement: 25 years
    *   Inflation-adjusted return: 0.93%
    *   Using PV function in Excel: =PV(0.93%,25,-2796574.29) = Rs.6,21,56,919.33 (approx Rs.6.2 crores)

Question 26

L's son wants to take a loan with the house as security and giving L's Will to prove his future ownership of the property. Is this a valid position?

Accepted Answer

No, since the provisions of the Will apply only on L's demise.. A Will is a legal document that dictates the distribution of assets only after the death of the testator (the person who made the Will). While the testator is alive, the Will has no legal effect on asset ownership, and the testator can modify or revoke it at any time. Therefore, L's son cannot use the Will to prove current or future ownership for securing a loan

Question 27

L is in her late 60s and wants to create a corpus for the college education of her grandchild, who is five years old. Which of the following funds would be best suited for L to create a corpus for her grandchild's education?

Accepted Answer

A large and mid-cap fund, since there is a long period before the goal has to be funded.. The hint in the text states: 'Since the goal has a long term to funding, L can take equity exposure irrespective of her age.' A grandchild's college education for a 5-year-old is a long-term goal (12-13+ years). Therefore, an equity-oriented fund like a large and mid-cap fund is suitable for long-term growth, despite L's age, as the investment horizon is long

Question 28

Mr. Kapoor has a base health policy of Rs.5 lakhs and a Super Top-up policy of Rs.15 lakhs with a deductible of Rs.5 lakhs. Over a year, he incurs three separate medical expenses: Rs.3 lakhs, Rs.4 lakhs, and Rs.6 lakhs. How much of the total expense will Mr. Kapoor have to bear out of his pocket?

Accepted Answer

Rs.0. 1. Base Policy: Rs.5 lakhs
2. Super Top-up Policy: Rs.15 lakhs with a cumulative deductible of Rs.5 lakhs.

*   **Medical Expense 1: Rs.3 lakhs**
    *   Base Policy covers: Rs.3 lakhs
    *   Base Policy remaining: Rs.5 lakhs - Rs.3 lakhs = Rs.2 lakhs
    *   Out of pocket: NIL
    *   Cumulative deductible met: Rs.3 lakhs

*   **Medical Expense 2: Rs.4 lakhs**
    *   Base Policy covers: Rs.2 lakhs (remaining balance)
    *   Amount remaining after base: Rs.4 lakhs - Rs.2 lakhs = Rs.2 lakhs
    *   Cumulative deductible met so far: Rs.3 lakhs (from Exp1) + Rs.2 lakhs (from Base in Exp2) = Rs.5 lakhs. The Super Top-up deductible is now met.
    *   Super Top-up covers: Rs.2 lakhs (the amount exceeding the base policy)
    *   Out of pocket: NIL

*   **Medical Expense 3: Rs.6 lakhs**
    *   Base Policy covers: NIL (already exhausted)
    *   Cumulative deductible met: Rs.5 lakhs (already met from previous expenses)
    *   Super Top-up covers: Rs.6 lakhs (since deductible is met and policy limit is Rs.15 lakhs)
    *   Out of pocket: NIL

Total out of pocket expense = NIL

Question 29

Charu, 35, earns Rs. 50,000 monthly and plans to work until 60. With inflation at 6% and long-term investment returns at 10%, she wants to ensure her family continues to have the income she would have earned throughout her working life. She currently has an insurance cover of Rs. 40 lakhs. How much additional life insurance should Charu take to meet these requirements?

Accepted Answer

Rs. 56 lakhs. Current Annual Income: Rs. 50,000 * 12 = Rs. 6,00,000
Years of employment left: 60 - 35 = 25 years
Inflation adjusted returns: [(1 + Investment Return) / (1 + Inflation Rate)] - 1 = [(1 + 0.10) / (1 + 0.06)] - 1 = (1.10 / 1.06) - 1 = 0.0377358 or 3.77%
Corpus required (PV of future income stream): PV(Rate=3.77%, Nper=25, Pmt=-600000) = Rs. 96,01,652.38
Insurance cover available: Rs. 40,00,000
Additional insurance cover required: Rs. 96,01,652.38 - Rs. 40,00,000 = Rs. 56,01,652.38
Rounded to Rs. 56 lakhs

Question 30

L has bequeathed her financial investments in mutual funds to her daughter through a Will. However, L's daughter has an immediate need for money to meet an emergency. Which of the following actions would enable L's daughter to access the money L has intended for her to have, immediately?

Accepted Answer

L can make a gift to her daughter of the required sum of money.. A Will only comes into effect upon L's death. For the daughter to access the money immediately while L is alive, L, as the primary holder of the mutual fund, would need to redeem the investment herself. L can then make a gift of the required sum of money to her daughter, which is also tax-free

Question 31

L, in her late 60s, wants to create a corpus for her five-year-old grandchild's college education. Considering the long period before the goal needs to be funded, which of the following funds would be best suited for L's investment?

Accepted Answer

A large and mid-cap fund, since there is a long period before the goal has to be funded.. For a five-year-old grandchild's college education, the investment horizon is long-term (typically 12-15+ years). The principle of goal-based investing suggests that for long-term goals, equity exposure can be taken, irrespective of the investor's current age, to potentially generate higher returns and counter inflation. A large and mid-cap fund provides the necessary equity exposure for such a long-term growth objective

Question 32

Ravi, aged 30, earns a monthly income of Rs. 60,000 and plans to work until age 55. He anticipates inflation at 5% and long-term investment returns at 9%. If he already has an insurance cover of Rs. 50 lakhs, how much additional life insurance should he take to ensure his family has a continued income stream at the same real value?

Accepted Answer

Rs. 69.41 lakhs. Current Annual Income (Rs. 60,000 * 12): Rs. 7,20,000
Years of employment left (55 - 30): 25 years
Return expected on investments (r): 9%
Inflation rate (i): 5%
Inflation adjusted returns (r_real) = [((1+r)/(1+i))-1] = [((1+0.09)/(1+0.05))-1] = (1.09/1.05) - 1 = 0.038095238 or 3.8095%
Corpus required (using PV function in Excel: =PV(Rate,Nper,Pmt)): =PV(3.8095%,25,-720000)
Corpus required = Rs. 1,19,41,133.40
Insurance cover available: Rs. 50,00,000
Additional insurance cover required = Corpus required - Insurance cover available
Additional insurance cover required = Rs. 1,19,41,133.40 - Rs. 50,00,000 = Rs. 69,41,133.40
Rounded to two decimal places: Rs. 69.41 lakhs

Question 33

An investment adviser is helping a 70-year-old client plan for her 6-year-old grandson's higher education, which is expected to begin in 12 years. Considering the long investment horizon for the goal, which of the following investment options would be most suitable?

Accepted Answer

A large and mid-cap equity fund, considering the long-term nature of the goal.. The suitability of an investment product for a goal is primarily determined by the time horizon of the goal, not solely the age of the investor. With a 12-year horizon for the grandson's education, there is ample time to ride out market fluctuations, making equity exposure (like a large and mid-cap fund) suitable for potential higher growth, irrespective of the client's current age

Question 34

An insurance policy requires an annual premium of Rs.7,500, out of which Rs.200 is allocated towards insurance cover. The investment portion of the premium is invested for 15 years, and the policy matures to Rs.1,50,000. What is the approximate return on the investment portion of this insurance policy?

Accepted Answer

5.1%. 1. Investment portion of premium = Total Premium - Insurance Cover Cost = Rs.7,500 - Rs.200 = Rs.7,300.
2. Term (Nper) = 15 years.
3. Maturity Value (FV) = Rs.1,50,000.
4. Using the RATE function (RATE(Nper,PMT,,FV)): =RATE(15,-7300,,150000) = 5.10%

Question 35

L is in her late 60s and has a comfortable pension and assets. She wants to create a corpus for the college education of her grandchild who is five years old. Which of the following funds would be best suited for L to create this corpus?

Accepted Answer

A large and mid-cap fund, since there is a long period before the goal has to be funded.. The investment choice for a specific goal should primarily be based on the time horizon of that goal, not solely on the investor's current age. The grandchild is five years old, implying the college education goal is at least 13-15 years away (assuming college at 18-20). This constitutes a long-term goal. For long-term goals, equity funds like large and mid-cap funds are generally suitable to generate inflation-beating returns, as the long horizon allows for riding out short-term market volatility

Ch.19: Comparison of Products across Categories

What You Will Learn in This Chapter

Multiple Choice Questions (35)

Case-Based Questions (1 sets)

Ready to Test Yourself Under Exam Conditions?