RAIP - Workbook

9. State which one of the following statements is correct? a) The Ombudsman is a judicial authority b) The award given by the Ombudsman is binding on the insurer c) Both the statements are correct d) Both the statements are wrong 10. __________ is the regulatory body which grants license to operate as an Insurance Broker in India. a) IRDA b) Managing director of the company c) Licensing officer d) Controller of insurance 2 - Marks Questions 11. In pooling of risk, several insurance companies create a risk pool of funds for covering certain risks. Which of the following is not intended in risk pools? a) Insurance companies are able to extend insurance to individuals or businesses likely to create sizable claims b) In case of catastrophic events, insurance companies spread the loss amongst all members c) The pool account acts like a buffer to absorb the excess risk covered by individual participating insurers for all types of risk d) This helps private insurers to carry out business by spreading excess risk and providing more competitive premiums to individual customers 12. A contract whereby one of the parties is bound to comply with his promise and there is no such binding on the other party to do so in future is called a contract of the nature of: a) Contingent b) Aleatory c) Unilateral d) Conditional CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 47

13. Which one of the following statements is correct: a) Section 45 of the Insurance Act 1938 is applicable after completion of the first three policy years b) The incontestable clause is applicable from the commencement of a life insurance contract c) Both the statements are correct d) Both the statements are wrong 14. A composite broker is that broker who carries on business as __________. a) Insurance & reinsurance broker b) Broker & agent c) General & life insurance broker d) Any of the above 15. The __________ is one who holds a license to act as an insurance agent for a life insurer as well as a general insurer. a) Composite Insurance Agent b) Banc assurance Agent c) Designated Person d) Corporate Agent SOLUTIONS 1 (c) 6 (d) 11 (c) 2 (a) 7 (a) 12 (c) 3 (b) 8 (b) 13 (c) 4 (c) 9 (c) 14 (a) 5 (d) 10 (a) 15 (a) CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 48

Additional Practice Questions Q1. A client’s 20 year money back policy of sum assured Rs.2 lakh has annual premium of Rs.13672, Policy pays back 20% of S.A after each of first three 5-years survival periods and another 40% of S.A. on surviving full term. The client has received the third money back. You estimate the gross returns presently in the policy considering reversionary bonus of Rs.50 per thousand S.A. You compare the cost benefit if the client pays all premiums and survives the policy and also gets Rs.150 per thousand S.A as loyalty bonus. You conclude that _________. a) the overall return improves marginally by 1.15% p.a b) the additional in flow on 5 future premiums would amount to over 19% p.a returns c) the additional in flow on 5 future premiums would amount to nearly 30% p.a returns d) the additional in flow on 5 future premiums less opportunity cost would amount to nearly 12% Q2. A client has a cash asset of 70 Lakhs, a housing loan of 52 lakhs. 6 years hence wants 1 cr (in today’s value) to set up child business and 10 years hence wants 50 Lakh (in today’s value) for daughter’s marriage. What is the life cover required? Inflation adjusted monthly expense 50000 now for his family & that of the spouse 35 years survival continuing after 10 years. Inflation is 7% & investment rate is 11% a) 220 Lakh b) 299 Lakh c) 144 Lakh d) 162 Lakh Q3. A family spends 35000 pm. There is a loan outstanding of 42 lakhs. The client’s son wants to study abroad after 5 years and 50 lakhs (in future terms) is the cost against which he has a saving of 27 lakhs. Find Inflation adjusted life cover for replacing the client, for 5 years of family expense & such life expenses @ 40% for spouse’s 30 years survival. Inflation is 5.5% and Return is 9.5% a) 109 Lakhs CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 49

b) 101 Lakhs c) 106 Lakhs d) 91 Lakhs Q4. Which of the following loss can be insured? a) Loss of profit caused by factory shut down due to strike of workers b) Loss of a customer's market reputation due to wrong return of cheque by the banker c) Loss due to reduction in sale of a product as a result of research outcome d) Loss of brand image caused by wrong report in media Q5. A warehouse insured its premises against fire and natural calamity for a value of Rs.1.25 crore. Towards liability coverage, separate insurances for risks of fire and burglary for Rs.12 crore each were taken to cover the goods kept at any time. The company took an umbrella insurance of Rs.15 crore also. The warehouse was completely destroyed in fire. The registered value of goods at that time was Rs.30 crore. What insurance can be settled in the Company’s claim? a) Nil to the Warehouse and Rs.28.25 crore towards liability proportionately to clients b) Rs.1.25 crore to the Warehouse and Rs.19.8 crore towards liability proportionately to clients c) Rs.1.25 crore to the Warehouse, Rs.12 crore (max.) towards liability for perishable goods of clients, and Rs.15 crore (max.) towards liability proportionately to others d) Rs.1.25 crore to the Warehouse and Rs.27 crore towards liability proportionately to clients Q6. Insurance companies apply the Law of Large Numbers to determine ________. a) the likely cost of total annual claims b) the insurance need of a person c) the paid up value of a policy d) the average maturity value of a policy Q7. Which of the following cannot be a criterion for identifying an insurable risk? Page 50 a) The past statistics of the risk should be available b) Its chance of occurrence can be deduced from past information c) It definitely holds out a possibility of loss d) It holds out prospects of gain as well as loss CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook

Q8. Which of the following factors does not match with the need of health insurance? a) Financial protection from rising cost of hospitalization b) Increase in the incidence of critical diseases and accidents c) Access to best medical facilities without liquidating assets d) Improving longevity and better medical facilities Q9. Which of the following cannot be claimed under travel insurance? a) Medical expenses due to hospitalization or personal accident when travelling abroad b) Burglary and robbery for Indian home while travelling abroad c) Without limit theft of cash and/or jewelry when abroad d) Loss of baggage and financial loss due to delay or cancellation of flight Q10. The purpose of Excess is to _____. a) provide the insured excess cover over the card rate at a small premium b) fix a limit up to which claims are settled in a cashless manner c) fix a quantum which the claim cannot exceed per contingent event d) restrict coverage to events that are significant enough to incur large costs Q11. Principle of contribution is associated with: a) Proximate clause b) Motor insurance c) Engineering insurance d) Indemnity Q12. The amount of human life value is calculated by properly discounting a) Current earnings of the insured b) Saving potential of the insured c) Fraction of the income of the insured that is used for the dependents d) Social status of the insured CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 51

Q13. Identify which of the following is an outcome of adverse selection. a) Fall in premiums and partial collapse of an insurance market. b) Escalation of premiums and complete fall down of insurance market through the withdrawal of individuals. c) Fall in premiums and increased number of insurance purchases. d) Escalation of premiums and increased number of insurance purchases. Q14. Clinical Trial Liability Insurance covers legal liability arising out of _______. a) lack of care, negligence resulting in injury or death of a trial subject b) claim as a result of a lawful act committed while performing duties c) death or disability occurring in clinics or hospitals due to negligence d) third party damages caused due to accidents caused in test runs of automobiles and airplanes Q15. Under the Directors and Officers Liability policy, a company seeks to _______. a) alienate itself against any liability arising due to the bona fide acts of its directors and officers in the performance of their duties b) indemnify itself, its directors and officers against certain damages and legal costs brought on by the alleged wrongful acts in their official capacity without a mal-intent c) protect its directors and officers against contingencies such as onsite accidents in the performance of their duties d) indemnify only its directors and officers against certain damages and legal costs brought on by their fraudulent acts Q16. Which of the following factors does not match with the need of health insurance? a) Financial protection from rising cost of hospitalization b) Increase in the incidence of critical diseases and accidents c) Access to best medical facilities without liquidating assets d) Improving longevity and better medical facilities Q17. You have advised Anamika to buy a Householders Insurance policy. She wants to know how the value of house and its contents are assessed by the insurance company. a) The value of House and that of various belongings in the house are assessed as per their individual market value. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 52

b) House's value is assessed as per its re-instatement value and the value of the various belongings in the house is assessed as per their individual market value. c) The value of House and that of various belongings in the house are assessed as per their reinstatement value. d) The value of House is assessed as per its market value and the value of the various belongings in the house is assessed as per their individual re-instatement value. Q18. A company has insured its plant for Rs.12 cr with insurer ABC Ltd. & XYZ Ltd. in equal ratio. Due to fire it suffered damage and got Rs.8 cr claim from insurer XYZ Ltd., which is tenable? a) XYZ Ltd getting a reimbursement of 4 cr from ABC Ltd. b) ABC Ltd reimburses XYZ Ltd Rs.2 cr and settling claim of Rs.4 cr of the company c) The company seeking a claim of Rs.8 cr from ABC Ltd. as well. d) The company seeking a claim of Rs.4 Cr from ABC Ltd. Q19. Mr. X has taken comprehensive insurance for car. He met a loss of Rs.60,000 out of which Rs.10,000 are for accessories. Deductible is Rs.5,000. Insurance was taken for Rs.5 lakh. What would be the claim amount Mr. A will receive from the insurance company for the car damage and accessories? a) Rs.50,000 and Rs.10,000 b) Rs.45,000 and Rs.10,000 c) Rs.60,000 and Rs.5,000 d) Rs.45,000 and Rs.5000 Q20. A client has a 20 year endowment policy with Sum Assured of Rs.10 lakhs and premium of Rs.26147 per annum. He has paid 15 premiums and have accumulated Rs.825000 towards declared bonuses. The client does not want to continue the policy. He does not wish to continue the policy. He has the option to make policy paid up or surrender the same at a factor of 75% of paid up value, what return he should earn on the surrender value to offset the paid up value? a) 2.57% b) 3.95% c) 6.67% d) 5.92% CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 53

Q21. Once the risk is measured, insurers either charge more for the higher risk or refuse to cover the higher risk at all in order to protect themselves from______. a) inadequate reserves b) unfair profiteering by the insured c) adverse selection d) resorting to reinsurance Q22. Physical hazards in case of non-life insurance are _________. a) hazards caused by the carelessness of the operating entities b) unrelated incidents aggravating a situation of peril c) hazards caused by external environmental factors d) hazards arising from a situation’s structural or operational features Q23. Morale hazard arises from __________. a) the insured’s intrinsic character differentiating right from wrong b) the possibility that having insurance makes us less careful towards a perilous situation c) the insured’s conscious and malicious intent to cause a loss d) the insured’s tendency to profit from a situation of peril Q24. You estimate life cover for your client who is 32 years old, has Rs.25 lakh in loan liabilities, has a non-working spouse of age 30 and children of age 7 years and 5 years. Additionally, the client wants higher education for each of his children Rs.Rs.30 lakh (in today’s value) after 15 years and marriage expenses of Rs.15 lakh (in today’s value) after 20 years. Both are considered at current costs. Their present household expenses are Rs.50,000 per month which includes housing loan EMI of Rs.15,000. The client consumes per month Rs.8,000 on self. You additionally provide for 30 years' living expenses after the spouse's age of 55 considering she would require only 60% of expenses thereafter. He has an insurance cover of Rs.40 lakh presently and his financial investments are Rs.15 lakh. The additional quantum of life insurance cover is _____. (Assumes that all expenses required are inflation adjusted at average inflation of 5% and the claim amount invested to yield 8% p.a.) Q25. A participating policy of 20 years with sum assured of Rs.5 lakhs at a premium of Rs.31356 p.a. has revisionary bonus of 50/1000 of SA for the first 4 years, 55/1000 of SA in the CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 54

next 10 years and 60/1000 of SA in the remaining years. The maturity bonus is also declared at 115/1000 of SA. Find the effective rate of return? a) 5.19% b) 11.19% c) 7.74% d) 4.73% Q26. An executive aged 50 has current savings of Rs 80 lakh and Rs.1.2cr life cover (20 years money back of sum assured Rs.20 lakh and three term policies of Rs.20 lakh, Rs. 30 lakh and Rs.50 lakh sum assured all are due to near his age of 60). His liabilities are housing loan Rs.12 lakh and he requires lump sum of Rs.20 lakh (in future terms) each for his daughter’s higher studies in 3 years and marriage in 5years. He desires for his spouse inflation linked stream of Rs.25000 per month for 40 years, you review his life cover by taking inflation 6%p.a., investment return 8.5%p.a. and advise that_________ a) he needs cover of Rs.50 lakh today, he may surrender two term policies of total cover Rs.70 lakh. b) he needs cover Rs.1.2cr today he should continue all policies. c) he needs cover of Rs.25lakh today he may surrender all term policies of total cover Rs.1cr. d) he needs cover of Rs.40 lakh today, he may surrender two term policies of total cover Rs.80 lakh. Q27. The factory was made 6 years ago for Rs.80 lakhs. The construction cost is increasing at 8% per annum. Depreciation is at 6% per annum using straight line method. What value is likely to be insurable under fire on Market value basis (MVB)? Q28. Mr. Manohar, aged 32 years, is the sole bread-earner of the family is expected to retire at age 60. He expects an annual growth of 8% in his existing income of Rs.7 lakh p.a. What economic value could be ascribed to his life today, if he considers an average investment yield of 10% till his life expectancy of 85 years. Q29. 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.1.5 lakh. The company historically has declared reversionary bonuses and terminal bonus per thousand sum assured at Rs.35 and Rs.80, respectively. A term plan with same life and 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. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 55

Q30. A bungalow was constructed at a cost of Rs 2crore in 2010 and a further Rs.1 crore was spent over on furnishing in 2012. The bungalow is valued at Rs.12 crore in 2016.The costs of construction and furnishing have escalated rate 10% and 15% respectively over the period. The owner wants to totally absolve himself of any expenses, in case bungalow is razed down due to some peril. At what value would you advise the owner to insure the property? Q31. Derive policy cost per thousand with the following data:- Cash surrender value at the end of current policy period - 6, 80,000 Cash surrender value at the end of previous policy - 6, 00,000 Death benefit = 20, 00,000 Annual premium = 14,000 Dividend or bonus = 15,000 Interest allowed equivalent to after tax return = 17% Policy cost/ conversion = 0.001 Q32. Sum assured under an existing policy purchased 10 years back is Rs.1,00,000 with an annual premium of Rs.1800. It’s current cash value (surrender value) is Rs.20, 000. Which will go up to Rs.22, 900 if the policy is continued. Client’s current age is 30 years. If a client wants to switch over to a new term assurance policy for a sum assured of Rs.80,000, its annual premium would be Rs.300. If a client can earn 6% tax free Interest on cash value of existing policy, then compare the switch over arrangement and give your opinion? (a) To discontinue the policy. (b) To continue the policy. (c) More information is required. (d) None of the above. Q33. A family’s monthly expenditure is Rs. 85000. The earner accounts for 25% of the expense. He wants to cover his family’s inflation-adjusted expenses for the next 48 years considering average inflation at 5.50% per annum and the investment return at 9% per annum. The approximate life insurance needed is : Q34. Mr. X, current age 30, current annual package Rs.12 lakh and annual increment is 12% p.a. His boss will promote him in next cadre after 8 years from now with Annual package of Rs.22 lakh and increment @ 15% p.a. thereafter. As per company rule the retirement age is 60. Now Mr. X decides to purchase a life cover by income replacement method. What is the cover he should go for if the rate of interest is 10% p.a.? CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 56

Q35. Mr. A has monthly household expenses of Rs. 40,000 and he himself consumes 25% of them. You compute his life cover on the basis of 15 yrs living expense for the family and 30yrs expense for his spouse reduced to 50% of then expenses. Expenses are adjusted for average inflation 5%pa and return from investment is expected at 7.5% pa. The life cover comes to? Q36. Mr. A has monthly expense Rs. 30,000 and he himself consumes 20% of them. He would require Rs.50 lacs for daughter’s education after 5 years and Rs.1 crore for marriage after 10 years from now. He has current investment of Rs.27 lacs. You compute his life cover on the basis of 15 years living expense for the family and 30 years expense for his spouse reduced to 60% of then expenses. Expenses are adjusted for average inflation 7.5% p.a. and return from investment is expected at 9.5% pa. The life cover comes to? Q37. Mr. ANIL has monthly household expenses of Rs. 80,000 and he himself consumes 25% of them. You compute his life cover on the basis of 20 yrs living expense for the family and 30yrs expense for his spouse reduced to 60% of subsequent expenses. Expenses are adjusted for average inflation 8%pa and return from investment is expected at 7.5% pa. The life cover comes to? Q38. Rohan, aged 29 years, is working with a multinational company. He has approached you, a CFPCM practitioner, for preparing his Financial Plan. His wife Anita, aged 31 years, is a fashion designer. They have a son, Ram of age 4 years, and a year old daughter, Sunita. Their monthly house hold expenses Rs.40000 Goals: 1. Accumulate in a fund, higher education expenses of Ram and Sunita. Expenses at their respective age of 18 years are Rs. 4 lakh p.a. (current cost) required for four years, cost escalation 8% p.a. 2. Marriage expenses of Rs. 10 lakh (current cost) for each child at around their respective age of 25 years, cost escalation 9% p.a. Assumption: Rate of interest 9% p.a. Inflation 6% p.a. A. You compute the value of total insurance cover by considering his above two goal and current household expenses, required inflation adjusted, to the extent of 80% until Anita’s age of 55 years and 60% of then expenses for the remaining period of her expected life i.e. age 80. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 57

B. You suggest Rohan insurance cover which would take care of outstanding loans( i.e. Rs. 20 lacs ), financial goals of higher education of their children, marriage and the monthly inflation-adjusted expenses to the extent of 75% of their present household expenses for next 25 years and 50% for the subsequent 20 years. If the claim from insurance could be invested to generate 9% p.a. return, what approximate life cover is required? Q39. Calculate Half-yearly Premium in the following case. SA: Rs25,000 with Double Accident & Extended Permanent Disability Benefit @Re.1,Age Nearer Birthday35, Endowment with profits for 30 years Tabular Premium 36.55, Rebate for mode: Half-yearly - 1.5% SA rebate Re.1 on Rs.10,000 and above? (a) Rs.475; (b) Rs.450 (c) Rs.500 (d) Rs.400 Q40. From the following data, calculate the claim payable under the policy. Plan and term endowment - 40 years Sum assured - Rs.50,000 Date of commencement - 20- 2-2001 Date of death of life assured - 18-2-2014 Quarterly premium Rs.300 due in February 2014 paid on 6th February 2014, bonus vested Rs.36,000. (a) Rs.86,000 (b) Rs.86,300 (c) Rs.89,400 (d) Rs.89,700 Q41. Mr. Sharma has a 20yr policy and paying premium of Rs 22,100 p.a. and having SA of Rs.10 lacs. He has paid 17 premiums and has vested bonus of Rs 9,35,000 towards the policy. He has in the meanwhile obtained life cover and accumulated wealth and does not wish to continue the policy. He has the option to make the policy paid up or surrender the same at factor of 85% of paid up value. What return should he earn on the surrender value to offset the paid value.? (a) 6% (b) 5% (c) 5.57% (d) None of the above CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 58

Q42. A money back policy for Sum Assured of Rs. 5,00,000. The term of the policy is 25 years. Survival benefits of 15% each had been paid at the end of 5th, 10th, 15th and 20th years. The annual premium in this plan is Rs. 25000. Vested bonus Rs.1030 per thousand SA. Calculate the maturity claim amount. Q43. A money back policy for Sum Assured of Rs. 1,00,000. The term of the policy is 12 years . Survival benefits of 15% each had been paid at the end of 3rd , 6th , 9th years. There is a guaranteed simple reversionary bonus Rs.36 per thousand sum assured. Annual premium is Rs.11000. Calculate the maturity claim amount and yield of this plan.? Q44. A participating endowment life policy of term 20yrs with SA Rs 5 lacs, declared simple reversionary bonus at 50/1000 sum assured in the first 4 years, 55/1000 in the next 10yrs, 60/1000 in the remaining years to maturity. The maturity bonus (final additional bonus) also declared at Rs 115/1000. The annual premium on the policy was Rs 31,356. Find the return under this plan? Q45. A non participating limited payment endowment with profit policy for Sum Assured of Rs.5,00,000. The term of the policy is 25 years..premium paying term is 16 years. There is guaranteed compound reversionary bonus Rs.45 per thousand sum assured & Final additional Bonus is Rs.200 per thousand SA. The annual premium is Rs.19800. Calculate the maturity claim amount and yield of this plan? Q46. A with profit life insurance policy with a track record of offering bonus at 50/1000 SA has a premium differential of Rs 25/1000 SA from a pure term policy. The pure term cover of 20 year and SA Rs 10lacs is available at Rs 6540 p.a. Your client has recently paid 18th premium in the policy. You evaluate the differential return from the policy in case the mortality today from the perspective of 8%p.a. Q47. Ms. X has a Money back insurance policy of sum assured Rs.4 lacs of term 20 years with annual premium Rs.25000. She will get a 20% survival benefit at the end of 5th / 10th & 15th year of the policy and 40% at maturity along with simple reversionary bonus of Rs. 46 per thousand plus a final additional bonus of Rs.140 per thousand sum assured. She wants to know the underlying IRR in this policy if a stand-alone term insurance for Rs.4 lakh is available at an annual premium of Rs.1200 for her. According to you it is ______________ per annum. Q48. A Life Insurance Agent has approached you with two types of Term Insurance Plans: (i) Plan I, without return of premium, term 25 years, Sum Assured of Rs. 25 lakh, yearly premium payable Rs. 1.94 per thousand of SA CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 59

(ii) Plan II, with return of total premiums paid, on maturity, term 25 years, Sum Assured of Rs. 25 lakh, yearly premium payable Rs. 2.95 per thousand of SA. You need to know which plan is better, if risk free rate is 8% p.a. (Assuming you live till maturity of the Insurance Policy) Q49. Ram has got a proposal for a ULIP plan from his friend, who is an insurance advisor. This plan has the following premium allocation charges: Year 1 Year 2 & 3 Year 4 & 5 Year 6 onwards Premium Allocation Charge 14% 5% 3% 2% In addition the following charges shall also be levied; 1) Mortality Charge (charged at the beginning of the year) - Rs.1.8 per thousand sum assured, 2) Policy Admin Charge (charged at the beginning of the year) - Rs. 700 p.a, throughout term 3) Fund Management Charge (charged at the yearend) - 1.25% p.a., throughout term The proposal envisages that Ram invests Rs. 50,000 p.a. for 10 years. Premium, less charges, is allocated to the fund. The fund grows @12% annually. Proposed Sum Assured in this ULIP plan is Rs.5 Lakh which remains the same throughout the term. Under the policy terms, Sum Assured and the value of units, both are paid on death. Ram wants to know in case he opts for the ULIP Plan as proposed by his friend what will be the approximate accumulation at the end of 10 years on his survival and what will be the claim proceeds if he were to pass away at the end of 8 years since inception of policy? Q50. A couple with no dependents and age 60yrs (male) and 58yrs (female) has a corpus of 1 crore. Their expectancy to live is 80yrs (male) and 83yrs (female). Following are the annuity options: (1) Guarantee period of annuity of Rs 9.43lakhs p.a. for 20yrs. (2) Rs 8.37lakhs p.a. as joint life annuity. (3) Rs 7.28 lakhs p.a. as joint life annuity with return of purchase price. (a) Option 1, as it gives highest returns. (b) Option 2, as it covers wife life expectancy. (c) Option 1, as it gives higher annuity for husband. (d) Option 3, as the corpus comes backs and return is high. Q51. The insured has a policy of an Rs.10, 00,000 loss is Rs.60,000 and market value is of Rs.15,00,000 at the time of loss. How much claim he will get? (a) Rs.10, 00,000 (b) Rs.60, 000 (c) Rs.40, 000 (d) Rs.15, 00,000 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 60

Q52. Mr. Sharma bought a piece of land in January, 2006 for Rs. 56 lakh. He got a factory built on the land at a cost of Rs. 70 lakh on 1st April, 2009. The land prices have appreciated at 20% per annum and the construction cost has escalated at 15% per annum. At what value the factory should be insured in December, 2016 on Market Value basis if the depreciation on factory premises is charged at 6% per annum on A. straight line method? B. written down value basis? Q53. Mr. X set up a cosmetic manufacturing unit purchased a land in 2008 for Rs. 100 lakh and got specialized construction done in 2009 for Rs. 136 lakhs. In December, 2010 the manufacturing unit was constructed at a cost of Rs.215 lakhs. The cost of such construction and unit are escalating at 12% p.a. The corrosive nature of chemicals requires depreciation on unit as well as premises at 15% p.a. on straight line method basis. As in 2015, what additional reserves should be created by the company apart from the depreciation reserves of plant and premises to reinstate the facility in case it is destroyed in a calamity? Q54. The registration cost of a particular car in April 2009 was Rs 40000. mr. X purchased car in April 2009 for Rs.12.55 lakhs which includes registration cost, extended warranty costing Rs.5500 , insurance premium of Rs.27,660 for zero depreciation cover and road tax Rs.12000. He installed accessories worth Rs.1.85 lacs. Insurer considered depreciation on car at 15% p.a. and on accessories 17% p.a. on WDV basis. The car was insured in April 2013 for a total valve of Rs 7.12 lacs. Find the insurance claim payable to Mr. X if it is stolen on December 2013 Q55. Mr. A’s private car got his car insured in package policy for IDV Rs 4 lakhs with owner-cum- driver insurance cover of Rs. 2 lakh. The car involved in an accident resulting in following losses. 1. Damage to car 2. Mr. ‘A’ lost one leg 3. 2 passenger of taxi died (taxi was hit by A’s car) 4. Taxi was also damaged by A’s car Which of the damages are payable by the insurer of Mr. A’s car. a. 1 only b. 1 and 2 only c. 1,2 and 3 only d. all 1 to 4 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 61

Q56. A person has taken comprehensive policy on his private car at insured declared value of Rs. 50000, has compulsory excess clause Rs.2000. His car collided with other car resulting his own damage of car costing Rs.60000, loss of other car costing Rs.10000. How much claim is payable? Q57. A car owner insured his car at idv 1.5 lacs in which Rs.5000 is compulsory deductible. The car meets with an accident and was damaged. Claim was assessed of Rs.60000 including 10000 which was spent on accessories of car, he did not include accessories in insurance cover. What cover is admissible to car owner is paid a. 50000 b. 45000 c. 50000 d. 45000 Q58. The registration cost of a particular car in April 2012 was Rs 40,382. A corporate purchased car in April 2010 for Rs 8.06 lakhs which includes Rs 7500 on extended warranty and Rs 18,118 for insurance. Accessories were installed costing Rs.1.5 lakhs. Insurer considered depreciation on car at 20% p.a. and on accessories 35% pa on WDV. The car was insured in April 2012 for a total value of Rs 6.5 lakhs. Find the eligibility of insurance claim on the car in case it is stolen Q59. A painter has purchased a personal accident policy of sum assured Rs.5 lacs. He met with an accident and lost his one hand above wrist which is used for painting. He will be considered................... a. permanent partial disabled b. temporary total disabled c. permanent total disabled d. temporary partial disabled Q60. A painter has purchased a special contingency policy of sum assured Rs.5 lacs. He met with an accident and lost his one hand above wrist which is used for painting. He will be considered................ a. permanent partial disable b. temporary total disabled c. permanent total disabled d. temporary partial disabled CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 62

SOLUTIONS Q1. Step-1: Calculate the returns after paying 15 premiums 1 -13672 2 -13672 3 -13672 4 -13672 5 -13672 - 6 26328 13672+20%*200000 7 -13672 8 -13672 9 -13672 10 -13672 11 26328 -13672+20%*200000 12 -13672 13 -13672 14 -13672 15 -13672 20%*200000 + 16 190000 50/1000*200000*15 IRR after paying 15 4.796% premiums CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 63

Step-2: Calculate the returns after paying 20 premiums 1 -13672 2 -13672 3 -13672 4 -13672 5 -13672 6 26328 -13672+20%*200000 7 -13672 8 -13672 9 -13672 10 -13672 11 26328 -13672+20%*200000 12 -13672 13 -13672 14 -13672 15 -13672 16 26328 -13672+20%*200000 17 -13672 18 -13672 19 -13672 20 -13672 40%*200000 + 21 310000 50/1000*200000*20 + 150/1000*200000 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 64

IRR after paying 15 5.9470% premiums The overall return improves marginally by 1.15% (5.9470-4.796) 5200000 Q2. Housing Loan Money Required for Child Business (set begin n=6; I=(11-7)1.07=3.7383; FV=10000000: P/Y=c/y=1; PV(solve) =8023517.301 8,023,517.30 Daughter's marriage set Begin/ End 3,464,000.88 N=10;I=(11-7)/1.07=3.7383; FV=50,000; p/v=c/v=1, pv(solve)=3464000.86 PV of inflation adjusted living expenses for next 45 years (Calculate RRR) 13233616.71 Set begin, n=540 (45*12), i=3.7383,PMT-50000, P/Y=12;C/Y=1, Calculate PV Total amount of insurance required 29921134.89 Less: Cash Assets 7000000 Insurance Coverage Required 22921134.89 Correct Answer (A) Q3. 3.791469194 Real Rate of Return PV of inflation adjusted living expenses for 5 years of family expense 1919175.483 (Set begin, n=60 (5*12), i=3.7383,PMT=-35000, P/Y=12;C/Y=1, Calculate PV PV of inflation adjusted living expenses for 30 years of 40% of family 2524611.777 expense Step-1: FV of expenses after 5 years = 35000*(1+5.5%)^5 = 45743.60 Step-2: 40% of expense required = 18,297.44 Step-3: (Set begin, n=360 (30*12), i=3.7383,PMT=-18297.44, CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 65

P/Y=12;C/Y=1, Calculate PV = 3974341.685 4200000 Step-4: Set begin, n=5, i=9.5,FV= P/Y=12;C/Y=1, Calculate PV = 2524611.777 3,176,138.33 11819925.59 Housing Loan 2700000 Lump amount required for son's education invested at 9.5% 9119925.586 (Set begin, n=5, i=9.5%, FV=-50,00,000, P/Y=1;C/Y=1, Calculate PV Total amount of Insurance Coverage Required Less: Assets Accumulated for son's education Insurance Coverage Required Correct answer is D Q4. (a) Loss of profit caused by factory shut down due to strike of workers Q5. (d) Rs.1.25 crore to the Warehouse and Rs.27 crore towards liability proportionately to clients Q6. (a) the likely cost of total annual claims Q7. (d) It holds out prospects of gain as well as loss Q8. (d): Improving longevity and better medical facilities Q9. (c) Without limit theft of cash and/or jewelry when abroad Q10. (d) restrict coverage to events that are significant enough to incur large costs Q11. (d) Indemnity Q12. (c) Fraction of the income of the insured that is used for the dependents Q13. (b) Escalation of premiums and complete fall down of insurance market through the withdrawal of individuals. Q14. (a) lack of care, negligence resulting in injury or death of a trial subject Q15. (b) indemnify itself, its directors and officers against certain damages and legal costs brought on by the alleged wrongful acts in their official capacity without a mal-intent Q16. (d) Improving longevity and better medical facilities Q17. (b) House's value is assessed as per its re-instatement value and the value of the various belongings in the house is assessed as per their individual market value. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 66

Q18. (a) XYZ Ltd getting a reimbursement of 4 cr from ABC Ltd. According to principal of contribution, loss will be equally shared by both the insurance companies. Since, the entire loss amount of Rs.8 lakh has been settled by XYZ Ltd, the XYZ company will get reimbursement of Rs.4 cr (50% of 8 cr) from ABC Ltd. Q19. (b) Rs.45,000 and Rs.10,000 Loss on Accessories = Rs.10,000 which would be the claim payable for the accessories. Claim for cardamage = Rs.50,000 – Rs.5000 (deductible) = Rs.45,000 Q20. (d) 5.92% Paid Up Value= 1000000 * 15/20 + 825000 = 1575000 Surrender Value = 1575000 * 0.75 = 1181250 Calculate Rate (i%) Set begin, n=5, PV=-1181250, FV=1575000, P/Y=1; C/Y=1, Calculate i% I=5.92% Q21. (c) adverse selection Q22. (d) hazards arising from a situation’s structural or operational features Q23. (b) the possibility that having insurance makes us less careful towards a perilous situation Q24. Rate of return from investments 8.00% p.a. Rate of inflation 5.00% p.a Real Rate of Return = (8-5)/1.05 = 2.857142857 The ideal insurance cover at this stage should take care of: 1 Outstanding Loan Liabilities 2500000 1 Children's Higher Education Expenses 3932189.182 2 (Step 1: Calculate the future cost of higher education expense:- Set = begin/end, n=15, i=5, 2 PV=-30,00,000, P/Y=1;C/Y=1, Calculate FV; FV=6236784.53; Step 2 : Calculate the investment required for children education expenses today, Set = begin/end, CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 67

n=15, i=8, 1707780.799 3 FV=-6236784.53, P/Y=1;C/Y=1, Calculate PV; 4 PV=1966094.591; 27000 Step 3: Amount required for 2 children = 25 1966094.591*2 = 3932189 5821066.682 Children's Marriage Expenses Step 1: Calculate the future cost of marriage 54858.95 expense:- Set = begin/end, n=20, i=5, PV=- 30 15,00,000, P/Y=1;C/Y=1, Calculate FV; FV=3979946.558; 3 Step 2 : Calculate the investment required for marriage goal today, Set = begin/end, n=20, i=8, FV=-3979946.558, P/Y=1;C/Y=1, Calculate PV; PV=853890.3995; Step 3: Amount required for 2 children = 853890.3995*2 = 1707781 4 Living expenses for family until spouse's age of 55 Net expenses to be covered (50000-15000-8000) No. of years (55-30) PV of living expenses till spouse's age of 55 (Set begin, n=300 (25*12), i=2.857142857,PMT=-27000, P/Y=12;C/Y=1, Calculate PV PV=5821067 5 Living expenses for spouse after her age of 55 years Net expenses to be covered Step 1: Set = begin/end, n=25, i=5, PV=-27000, P/Y=1;C/Y=1, Calculate FV; FV=91431.5834; Step 2: Expenses required = 91421.5834*60%=54858.95 Number of years CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 68

PV of living expenses till spouse's age at 55 for 30 13347235.55 5 years (Set begin, n=360 (30*12), Page 69 i=2.857142857,PMT=-54858.95, P/Y=12;C/Y=1, 1948935.372 Calculate PV; PV=13347235.55 15909972.04 PV of such expense now (Set begin, n=25, i=8,FV=- 4000000 13347235.55, P/Y=12;C/Y=1, Calculate PV; 1500000 PV=1948935.372 10409972.04 Total Insurance Cover Required (1+2+3+4+5) Less: Existing Insurance Coverage Less: Financial Investments Additional Insurance Cover Required Now Q25. (a) 5.19% Sum Assured 5lakhs Term 20 years Premium 31356 p.a. Revisionary Bonus First 4 years = 50/1000 * 500000 * 4 = 100000 Next 10 years = 55/1000 * 500000 * 10 = 275000 Remaining 6 years = 60/1000 * 500000 * 6 = 180000 Total Revisionary Bonus = 555000 Maturity Bonus Maturity Bonus = 115/1000*500000 = 57500 Total Maturity Benefit = RB+MB+SA = 1112500 Calculate Rate (i%) Set Begin, N=20, PMT=31356, FV=1112500, P/Y=C/Y=1, Calculate I, i=5.19% Q26. Rate of return from investments 8.50% p.a. Rate of inflation 6.00% p.a Real Rate of Return = (8.50-6)/1.06 = 2.358490566 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook

1 Outstanding Loan Liabilities 1200000 Daughter's Higher Education Expenses (Step 1: Calculate 2 the investment required for the daughter's education 1565816.197 expenses today, Set = begin/end, n=3, i=8.5, FV=- 2000000, P/Y=1;C/Y=1, Calculate PV; PV=1565816.197 Children's Marriage Expenses Step 1: Calculate the 3 investment reuired for marriage goal today, Set = 1330090 begin/end, n=5, i=8.5, FV=-2000000, P/Y=1;C/Y=1, Calculate PV; PV=1330090 4 PV of Inflation adjusted living expenses for spouse for 40 years Expenses to be covered 25000 No. of years (55-30) 40 PV of inflation adjusted living expenses of spouse for 40 7811713.885 years (Set begin, n=480 (40*12), i=2.358490566,PMT=- 25000, P/Y=12;C/Y=1, Calculate PV=7811713.885 Total Insurance Cover Required (1+2+3+4) 11907620.08 But he has current savings of Rs.80 lakh Therefore he should be insured only for 39 lakh. Q27. Construction cost of Rs.80 lakhs Escalation in construction cost = 8% Reinstatement Value of the factory = (Set end; n=6, i=8, PV=80,00,000, ,P/Y=C/Y=1, FV (Solve) = 12694994.58 Market Value of the factory = Reinstatement value (RV) – Depreciation on RV = 12694994.58 - 12694994.58*6% *6 = 8124796.5 Hence, sum insured on market value basis = 8124796.5 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 70

Q28. Current net income = Rs.700,000 p.a. Rate of increase of net income = 8% Investment yield from investing = 10% Number of years the income is expected to continue = 25 years Economic value would be the all earnings of future years discounted today at the investment yield. RRR = (10-8) /1.08 = 1.851851852 Economic Value = (Set begin; n= 28(60-32); I= 1.851851852; PMT = 700000; PV(solve) = 154,68,050.55 Note 1: The Life Expectancy figure of 80 years is redundant here. Note 2: The Real Return formula is used here with 'investment yield' taken in numerator and growth taken in denominator. Q29. Premium of with-profit policy Rs.12,046 Premium of term policy Rs.3,565 The excess premium paid for the investment component = 12046 - 3565 = Rs.8,481 Revisionary Bonus = 35/1000 * 150000 * 15= 78750 Terminal bonus = 80/1000 * 150000 = 12000 Maturity value from with-profit policy on surviving the term = 150000 + 78750 + 12000 = 240,750 Return from an investment component = (Set begin, N= 15, PMT=-8481, FV=240750; P/Y=C/Y=1, I (Solve) = 7.6264) Return on investment component 7.63% p.a Q30. The escalated cost of bungalow as in 2016 @ 10% is Rs.35,431,220 (Set Begin; N=6 (2016-2010); I = 10%; PV=20,000,000; FV=Solve=35,431,220) The escalated cost of furnishing as in 2016 @ 15% is Rs.17,490,062.50 (Set Begin; N=4 (2016- 2012); I = 15%; PV=10,000,000; FV (Solve) =17,490,062.50) So, the owner should insure the property at Rs.35,431,220 + 17,490,062.50 = Rs.5,29,21,282.50 So, the cost to be considered for insurance is Rs.5.29 Crore Page 71 Q31. CPT = {(P+CVP) (1+i) - (CSV +D)} (F - CSV) x 0.001 CPT = {(14,000+6,00,000) (1+.17) - (6,80,000+15,000)} (20,00,000 - 6,80,000) x 0.001 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook

= 23,380 1,320 = 17.71 Q32. CPT = {(1,800+20,000) x (1+.06)} - (22,900+0) (1,00,000 - 22,900) x 0.001 =208/77.1 = 2.69 Cost of existing policy = 2.69 Cost of new policy = 300 x 1000 = 3.75 80,000 So, existing life insurance is better than purchasing a new policy as it’s cost is lower than the new policy. Q33. Current monthly household expenses Rs. 85000 Self-consumption = 25% Remaining Net expenses = Rs. 63750 Family Expenses period = 48 years To calculate the family expenses to be covered Set: Begin N = 576 I = 3.3175 PV=-18571677 (solve) PMT = 63750 P/Y = 12 C/Y = 1 Q34. Current earning = 12 lakh p.a. Annual increment = 12% p.a. Current age = 30 Age when he will be promoted = 38 Interest rate = 10% p.a. We have to calculate present value of income of first 8 years CMPD Set = begin N=8 I = (10-12)/1.12 Pmt = 1200000 Pv = 1,02,33,636 At age 38 his annual package would be 22 lakh and annual increment 15% p.a. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 72

We have to calculate present value of income which he will be earning from age 38 to 60. Step 1 Set = begin N = 22 I = (10-15)/1.15 Pmt = 2200000 Pv = 80294141 Step 2 Set = begin/end N=8 I = 10 Fv = 80294141 Pv = -37457809 Total present value = 10233636 + 37457809 = 47691445 Therefore total cover required by him = Rs. 47691445 Q35. Monthly expenses required by family = 40000 X 0.75 = 30000 First we calculate the Present Value of required expenses of first 15 yrs. Set = begin N=15 X 12 I=(7.5-5)/1.05 PMT=30000 P/Y=1 C/Y = 1 PV=Solve= - 4554364 After 15 years HHE = 30000 x (1.05)15 = 62367.84 Spouse would required monthly expenses = 50% of 62367.81 Corpus req. by spouse after 15 yrs. from now for last 30 years Set = begin N=30 x 12 I=RRR PMT=31184 P/Y=12 PV=Solve=8060308.6 Now we will discount it to initial point = 8060308.6/(1.075)15 = 27,24,110 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 73

Total corpus = 4554364 + 2724110 = 72,78474 Therefore he needs insurance cover of Rs.72,78,474 Q36. Monthly Expense 30000 Self expense 6000 HHE for family 24000 NPV of expense (for 15 years) Set : Begin N=15X12 I=(9.5-7.5)/1.075 PV = solve = -3777091.325 PMT=24000 FV=0 P/Y=12 C/Y=1 Expenses after 15 years = 24000 X (1.075)15 = 71013.056 60% of then expenses is required for spouse = 71013.056 X 60% = 42607.833 PV after 15 years Set : Begin N=30*12 I=(9.5-7.5)/1.075 PV=solve = 11791271.6 PMT=42607.833 P/Y=12 C/Y=1 NPV of above expenses = 11791271/(1.095)15 = 3022378.53 NPV of Education = 5000000 / (1.095)5 = 3176138.326 NPV of Marriage = 10000000 / (1.095)10 = 4035141.867 Life cover = NPV of house hold expenses + NPV of Edu + NPV of Marriage = 14010749 Current Savings = Rs.2700000 Cover needed = 14010749 - 2700000 = 11310749 Q37. Monthly expenses required by family = 80000 X 0.75 = 60000 First we calculate the Present Value of required expenses of first 20 yrs. Set = begin N=20 X 12 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 74

I=(7.5-8)/1.08 PMT=60000 P/Y=12 C/Y = 1 PV=Solve= - 15086457.79 After 20 years HHE = 80000 x (1.08)20=372876.5715 Spouse would require monthly expenses = 60% of 372876.5715=223725.9429 Corpus req. by spouse after 15 yrs. from now for last 30 years Set = begin N=30 x 12 I=RRR PMT=223725.9429 P/Y=12 PV=Solve=-86400225.5 Now we will discount it to initial point = 86400225.5/(1.075)20 = 20339749.08 Total corpus req. = 15086457.79+20339749.08= 35426206.87 Q38. First we will calculate the present value of education cost of both children using cash function I=RRR=(9-8)/1.08 1 to 14 – 0 15- 400000 16-400000 17-400000 18-4,00,000 + 4,00,000 19-400000 20-400000 21-400000 NPV=Solve= 2736326 Now we will calculate the present value of marriage of both kids I=RRR=(9-9)/1.09=0 1 to 21-0 22-10,00,000 23-0 24-0 25-10,00,000 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 75

NPV=Solve=20 lac. LIVING EXPENSES: Current household exp = 40000 p.m. 80% of current expenses will be required till Anita’s age of 55 = 40000 X 0.8 = 32000 p.m. PV of such expenses CMPD B N=24 X 12 I=(9-6) / 1.06 Pmt=32000 P/y=12 PV=Solve= 6724937 At age 55 expenses will be required till 80 = 32000 X (1.06)24 X 0.60 = 77739.54 PV of such exp at age 55 CMPD Begin N=25 X 12 I=(9-6)/1.06 PMT=+77739.54 P/Y=12 PV=16808694 PV of 16808694 at age 31 = 16808694/(1.09)24 =2124702 The total present value of expenses = 6724937 + 2124702 = Rs.8849639 Therefore total insurance cover is required = cost of education + cost of marriage + present value of household expenses = 2736326 + 2000000 + 8849639 = Rs.1,35,85,965 Therefore total insurance cover required by Mr. Rohan = Rs.1,55,85,965 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 76

B. Total Present value of high education cost of both children and marriage cost will be same as given in above questions i.e. = 2736326 + 2000000 = 4736326 Living Expenses: Current cost of household expenses = 40000 present value of expenses for first 25 yrs. CMPD Set = begin N=25 X 12 I=(9-6)/1.06 PMT=40000 X 0.75 P/Y=12 PV=solve = 6486542 Present value of expenses after 25 yrs for 20 yrs expenses CMPD B N=20 X 12 I=(9-6)/1.06 PMT=40000 X (1.06)25 X 0.5 = 85837.414 P/Y=12 PV=solve = 1,58,05,556 Present value right now of above value = Rs.1,58,05,556 / (1.09)^25 = 1832936 Total present value of household expenses = 6486542 + 1832936 = Rs.8319478 Outstanding loan = 20 lacs 15055804 Therefore total insurance cover required = 4736326 + 8319478 + 2000000 = Q39. B Tabular premium = 36.55 (-) Adjustment for mode (36.55 x 1.5/100) = 0.54825 = 36.55 - 0.54825 = 36.0017 Sum assured rebate = Re. 1 = 36.0017 - 1 = 35.0017 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 77

Rider (double accident) = Re. 1 = 35.0017 + 1 Annualized premium = 36.0017 Half yearly premium = 36.0017 x 25,000/ 1000 = 900.044 Ans 10. (b) = 900.04 / 2 = Rs.450.02 Q40. Sum assured = 50,000 Bonus vested = 36,000 Premium = 300 (premium was due on 20-2-2002 but he paid the premium on 06-02-2002, so his premium will also be returned) Claim = 50,000 + 36,000 + 300 = 86,300 Q41. Paid up value = 17/20 X 10 lacs + 9,35,000 = 17,85,000 Surrender value = 85% of paid up value = 85/100 X 17,85,000 = 1517250 Remaining term of the policy = 3 years Rate to be earned on surrender value to reach paid up value CMPD BEGIN N=3 PV= -1517250 FV=1785000 I=solve=5.57% P/Y =1 C/Y= 1 Q42. Maturity Claim Amount : Sum Assured = 5,00,000 Less : Survival Benefits paid = 3,00,000 ( 5,00,000 x 15 / 100 x 4) 2,00,000 Add : Vested Bonus = 5,15,000 Total Amount payable= 7,15,000 Yield : Cash 1 to 5 = -25000 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 78

6 = 75000-25000 7 to 10 = -25000 11 = 75000-25000 12 to 15 = -25000 16 = 75000 – 25000 17 to 20 = -25000 21 = 75000-25000 21 to 25 = -25000 26 = 715000 IRR = solve = 5.31% p.a. Therefore yield under this plan is 5.31% p.a. Q43. Maturity = balance sum assured + simple reversionary bonus of 12 years = 55000 + 36/1000 * 100000 * 12 = 98200 Yield: Cash function 1 to 3 = -11000 4 = 15000-11000 5 to 6 = -11000 7 = 15000-11000 8 to 9 = -11000 10 = 15000-11000 11 to 12 = -11000 13 = 98200 IRR = Solve = 1.7736% p.a. Q44. Maturity amount in this policy = 1112500 (50/1000 * 5 lac * 4 + 55/1000 * 5 lac * 10 + 60/1000 * 5lac * 6 + 115/1000 * 5 lacs + 5 lacs) CMPD Set = begin N=20 PMT= -31356 FV=1112500 I=Solve=5.19% Q45. Maturity = sum assured + compound reversionary bonus of 25 years + final additional bonus Using cmpd CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 79

Set = begin N = 25 I = 45/1000 = 4.5 Pv = -500000 Fv = solve = 1502717 1502717 is included sum assured and reversionary bonus Therefore maturity = 1502717 + FAB = 1502717 +100000 = 1602717 Yield: Using cash function 1 to 16 = -19800 17 to 25 = 0 26 = 1602717 IRR= solve = 9.2% p.a. Q46. Price differential in premium per thousand =Rs.25 Price differential in premium for a Rs. 10 lakh policy=25*1000000/1000 = 25000 Estimated bonuses on maturity of with profit policy= 50*18*1000000/1000=900000 Rate expected on maturity proceeds CMPD Set =Begin, N =18, PMT=-25000, FV = 900000, I = SOLVE = 6.9% Return differential from 8% p.a. =8-6.9 = 1.1% Q47. Sum Assured = 4 lacs Final Term = 20 years Premium = 25000 p.a. Maturity = Balance Sum Assured i.e. 40% of 4 lacs + Simple Revisionary Bonus + additional Bonus = 160,000 + 46/1000 x 4 lac x 20 + 140/1000 x 4 lacs = 584000 Annual Premium of money back plan = Rs. 25000 Term Insurance Premium of same sum assured = 1200 p.a. This means premium excluding term insurance is going to be invested i.e. 25000 - 1200 = 23800 Therefore return on investment only using cash function 1 to 5 = - 23800 6 = 80000 – 23800 = 56200 7 to 10 = - 23800 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 80

11 = 80000 – 23800 = 56200 12 to 15 = - 23800 16 = 80000 – 23800 = 56200 17 to 20 = - 23800 21 = 584000 IRR=Solve=7.40% Q48. In Plan I Premium = 1.94/1000 x 25,00,000 = 4850 p.a. In Plan II Premium = 2.95/1000 X 25,00,000 = 7375 p.a. If plan I taken then differential premium will be invested @ 8% p.a. return B N=25 I=8 PMT= - (7375-4850)=-2525 FV=SOLVE=199360 In Plan II, you will get your premium track at maturity = 7375 x 25 = 184375 Therefore Plan I is better Q49. Maturity amount after 10 years = 834497 If the person dies after 8 years the nominee will get sum of fund value of 8 years and sum assured Therefore total death claim will be payable = 591947 +500000 = 1091947 Q50. B CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 81

Q51. C Solution : Sum Assured x Loss = Claim Amount Market value Claim amount = 10, 00,000 x 60,000 = 40,000 15, 00,000 Q52. Cost of construction on 1-4-2009 = rs.70 lacs Cost escalated @ 15% p.a. Cost of construction in 2016 = 7000000*(1.15)^7 = 18620139 A. Straight line method Depreciation rate (on SLM method) = 6% p.a. Depreciated value = 18620139 * 42% ( 6% *7 ) = 7820458 Therefore, sum insured on market value basis = 18620139 – 7820458 = 10799681 B. Written down value basis Cost of construction in 2016 = 7000000*(1.15)^7 = 18620139 Therefore, sum insured on market value basis after depreciation = 12074743 ( cmpd, set-begin/end, n = 7, i = -6, pv = 18620139, fv=solve = 12074743 ) Q53. Cost of land = Rs.5,000,000 We never consider land in insurance Cost of Construction in 2009 of premises = 136 lacs Escalation cost = 12% p.a. Cost of premises in 2015 = 1,36,00,000*1.12^6 = 26843988 Cost of manufacturing unit in 2010 = Rs. 215 crore Escalation cost = 12% p.a. Cost of manufacturing unit in 2015 = 2,15,00,000*1.12^5 = 37890346 Total cost of reinstatement construction of premises and manufacturing unit = 26843988 + 37890346 = 64734334 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 82

Cost of manufacturing unit in 2015 = 2,15,00,000*1.12^5 = 37890346 Total cost of reinstatement construction of premises and manufacturing unit = 26843988 + 37890346 = 64734334 Depreciation rate on straight line method = 15% p.a. Balance value of premises after depreciation = Rs.1360000 ( 1,36,00,000 - 1,36,00,000 * 90% ( 15%*6 )) Therefore depreciation reserves to be kept = 13600000-1360000 = 12240000 Balance value of manufacturing unit after depreciation = Rs. 53,75,000 ( 2,15,00,000 – 2,15,00,000 * 75% ) Therefore depreciation reserves to be kept = 21500000-5375000 = 1,61,25,000 Total depreciation reserves to be kept for premises and manufacturing unit = 12240000 + 1,61,25,000 = 28365000 Additional reserves to be created = reinstatement value – depreciation reserves = 64734334-28365000 = 36369334 Q54. ( the solution given below might be followed for examination point of view ) Total cost of car = Rs.12.55 Lacs Car was insured for Rs.1169840 (Rs.12.55 Lacs – Rs.40000 – Rs.5500 – Rs.27660 – Rs.12000) Residual insured value of car after depreciation = 1169840*0.85*0.85*.85*.85 = 610664 Cost of accessories in 2009 = 1.85 Lacs Residual insured value of car after depreciation = 185000*0.83*0.83*0.83*0.83 = 87798 Claim Payable = 610664 + 87798 = Rs.698462 But practically in India total idv of car will be payable if it is stolen and become total damaged excluding compulsory excess i.e. 1000 for car having cc upto 1500 and Rs.2000 above 1500 cc. Q55. D Q56. Claim payable on his car = 50000-2000 = 48000 Third party property damage claim = 10000 Therefore total claim payable = 48000+10000 = Rs.58000 Q57. Claim was assessed = Rs.60000 Cost of accessories = Rs.10000 Compulsory deductible = Rs.5000 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 83

Claim is payable = 60000-10000-5000 = Rs.45000 Q58. Total cost of car = Rs.8.06 Lacs Car is insured of Rs.780382 (Rs. 8.06 Lacs – Rs.7500 – Rs.18118) Dep value of car after 2 years = 780382 X 0.8 X 0.8 = 499444 Cost of accessories in 2010 = 1.5 Lacs depreciated Value of car after 2 years = 150,000 X 0.65 X 0.65 = 63375 Claim Payable = 499444 + 63375 = Rs.5,62,819 But practically in India total idv of car will be payable if it is stolen and become total damaged excluding compulsory excess i.e. 1000 for car having cc upto 1500 and Rs.2000 above 1500 cc. Q59. A. Q60. C. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 84

VERY IMPORTANT QUESTIONS 1) A person has a house worth 60lacs on which he takes a loan of 40lacs for 15 years @9.5%p.a. He currently has a accumulated corpus of 35lacs. He saves 3lacs p.a from his total income and he also receives monthly rental income of 22,000 of which 20% are liable towards taxes and other expenses. Find the net worth if the net amount if invested quarterly @8%p.a from the next quarter ,for 5 years from now? Sol. First we need to calculate EMI END, N=180, I=9.5, PV=4000000, P/Y=12, C/Y=12, PMT =SOLVE = 41769 OUTSTANDING LOAN AFTER 5 YEARS GO TO AMRT PM1=1, PMT=60, BAL = SOLVE = 3227958 CURRENT ACCUMULATED CORPUS = 3500000 TOTAL SAVING IN FIRST YEAR = 300000+22000*.8*12= 511200 BUT SAVING QUARTERLY THEREFORE HIS TOTAL CORPUS AFTER 5 YEARS END, N=20,I=8, PV=-3500000,PMT = -127800 (511200/4), P/Y=4, FV=SOLVE = 8230182 TOTAL ASSETS = 60 LACS (HOUSE) + 8230182 = 14230182 LIABILITIES = 3227958 NET WORTH = 14230182- 3227958= 11002224 2) A person has a house worth 60lacs on which he takes a loan of 40lacs for 15 years @9.5%p.a. Real estate prices escalates @ 15% p.a. He currently has a accumulated corpus of 35lacs. He saves 3lacs p.a from his salary income and saving quarterly from next quarter. And he also receives monthly rental income of 22,000 of which 20% are liable towards taxes and other expenses and saves end of every month. Find the net worth if interest rate is @8%p.a,for 5 years from now? Sol. First we need to calculate EMI Page 85 END , N=180, I=9.5, PV=4000000, P/Y=12, C/Y=12, PMT =SOLVE = 41769 OUTSTANDING LOAN AFTER 5 YEARS GO TO AMRT CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook

PM1=1, PMT=60, BAL = SOLVE = 3227958 CURRENT ACCUMULATED CORPUS = 3500000 TOTAL CORPUS AFTER 5 YEARS STEP 1 END , N =20, I = 8, PV= -3500000, PMT = -75000, P/Y=4, FV=SOLVE = 6954581 STEP 2 END , N =60, I = 8, PMT = -17600, P/Y=12, FV=SOLVE = 1283826 TOTAL CORPUS AFTER 5 YEARS = 6954581+1283826= 8238407 COST OF HOUSE AFTER 5 YEARS = 6000000*1.15^5 = 12068143 TOTAL ASSETS = 12068143 ( HOUSE ) + 8238407 = 20306550 LIABILITIES = 3227958 NET WORTH = 20306550- 3227958= 17078592 3) A person has taken a car loan of 8lacs @ 12%p.a 3 years ago. He has also taken a personal loan of 3 lacs @18% p.a 1 year ago. Given, 2 years are still remaining in completion of the tenures of both the loans. He earns a windfall gain of 6 lakhs. The client asks the practitioner if he should invest this amount in bank FD @ 9% p.a for 2 years. The practitioner advises him to repay the loans and invest the EMIs on monthly basis in tax efficient instruments. The rate of interest band is 8-10% and there has been decrease in tax efficiency in 2 years. Find the net worth rise (band)___. Sol. Car Loan Personal Loan End End N=5 X 12 N=3 X 12 I=12 I=18 PV=8 lacs PV=3 lacs P/Y=12 P/Y=12 C/Y=12 C/Y=12 PMT=solve=17795.55 Pmt=solve=10845.71 AMRT AMRT PM1=1 PM1=1 PM2=36 PM=12 Bal=solve=378037.9 Bal=solve = 217244. Outstanding loan = 372037.9 + 217244 = 595282 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 86

If client invest in bank FD of Rs. 6 lacs. Corpus after 2 yrs. =6,00,000x (1.09)2 =712860 It client repay the outstanding loan then Balance = 6,00,000 – 595282 = 4718 Client will be able to save both emi in a scheme that gives 8% p.a. return Set = end N = 24 I=8 PV = -4718 Pmt = (-17795.55-10845) p/y = 12 FV= solve = 746219 CMPD END if EMI will be invested in a scheme that generates 10% p.a. return N=24 set = end N=24 I=8 I=10 PV= -4718 PV= -4718 PMT= (-17795.55-10845) PMT= -17795.55 – 10845 FV=759961 FV= solve = 746219 P/Y=12 C/Y =12 P/Y=12 C/Y =12 Net worth increases in 1st case =746219-712860 Net worth increases in 2nd Case =33359 759961 – 712860 =47101 The net worth rise from 33000 to 47000 4) An executive purchased an annuity for a lump sum Rs. 50 lakh when he was of 50 years and had in dependents a non-working spouse of age 47 and a son of age 22. On reaching age 60, he expects at least one, himself or his spouse, to survive till 85 years and contracts an immediate life annuity with return of purchase price at Rs. 9.03 lakh p.a. vested against the purchase price of Rs. 1.24 crore. What return is expected from the vesting date? CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 87

Sol. We will use cmpd function Set = Begin N=28 (As spouse age 57 at vesting date) PV= -1,24,00,000 PMT=9,03,000 FV= 124,00,000 P/Y= 12 C/Y = 12 I=solve = 7.85% 5) A has taken a loan of Rs 15lacs for 20 yrs @ 8.5% on April 2010. After a year bank raised the interest rate to 9.5% but EMI remained same and they increased the tenure. A GotRs2.5lacs from his company in march 2012. How much money he should pay to bank to come to his original tenure in March 2012. Sol. First we need to calculate EMI Set = END N=20 X 12 I=8.5% PV=15lac P/Y=C/Y=12 PMT=Solve=-13017 Outstanding Loan After one year AMRT PM1=1 PM2=12 Bal=Solve=1470146 After one year bank increases rate of interest to 9.5% p.a. but emi will remain same but tenure will be increased CMPD Set =end I= 9.5 PV= 1470146 Pmt= -13017(As tenure will to increased) CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 88

P/Y=C/Y=12 N=284.719 Outstanding Loan on March 2012 Pm1=1 Pm2=11 Bal=solve=1454366 If he wants the original tenure i.e. 240-12-11 = 217 CMPD Set = end N=217 I=9.5 PMT=-13017 P/Y=C/Y=12 PV= SOLVE = 1347206.048 But outstanding loan = 1454366 He should pay money to get the original tenure = 1454366 – 1347206.048 = 107159.952 6) The registration cost of a particular car in April 2012 was Rs 40,382. A corporate purchased car in April 2010 for Rs 8.06 lakhs which includes Rs 7500 on extended warranty and Rs 18,118 for insurance. Accessories were installed costing Rs.1.5 lakhs. Insurer considered depreciation on car at 20% p.a. and on accessories 35% pa on WDV. The car was insured in April 2012 for a total valve of Rs 6.5 lakhs. Find the eligibility of insurance claim on the car in case it is stolen Sol. Total cost of car = Rs.8.06 Lacs Car is insured of Rs.780382 (Rs. 8.06 Lacs – Rs.7500 – Rs.18118) Dep value of car after 2 years = 780382 X 0.8 X 0.8 = 499444 Cost of accessories in 2010 = 1.5 Lacs depreciated Value of can after 2 years = 150,000 X 0.65 X 0.65 = 63375 Claim Payable = 499444 + 63375 = Rs.5,62,819 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 89

But practically in India total idv of car will be payable if it is stolen and become total damaged excluding compulsory excess i.e. 1000 for car having cc upto 1500 and Rs.2000 above 1500 cc. 7) Mr. A purchases a flat at Rs 35 lakhs in Oct 2006. He took a loan of Rs 20lakhs for 15yrs@ 8.5% pa and cost of registration of house is 2 lakhs. The value increases in Oct 2012 at Rs 80 lakhs. What value flat towards his unencumbered interest after setting aside 12% of the appreciation value towards tax and other cost to be discharged on selling unit? Sol: First we calculate EMI of Loan Set = end N=15 X 12 I=8.5 PV= 2000000 P/Y= 12 C/Y=12 PMT=Solve= -19695 Outstanding loan in October 2012 AMRT PM1=1 PM2=72 Balance = Solve = 14,83,114 Appreciated value of that = 80 Lacs – 37lacs ( 35+2) = 43 lacs. Amount towards taxes =12% of 43 lacs. =5,16,000 Home equity in the flat = 80 lacs – 14,83,114 – 516000 = 60,09,886 8) Current age of Mr. Sharma is 30 working with a private company fetching annual alary 600000. He decides to save 15% of his income at the end of every year till retirement age 60. He will require Rs.10 lacs for his son’s higher education after 10 years and rs. 12 lacs for his marriage after 15 years from now.How much corpus he would be able to accumulate at age 60 if roi 12%, inflation 5%. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 90

Sol: After 10 yrs. accumulated corpus END N=10 I=12 PMT=-6,00,000 X 0.15 FV=Solve=1579386 P/Y = 1 C/Y =1 cost of education after 10 years = 10 Lac Balance corpus after paying education fees =1579386 – 10 lacs = 579386 Now we will calculate the corpus after 5 more years ( i.e. after 15 years from now ) Set = END N=5 I=12 PV= -579386 PMT= -90000 FV=solve = 1592833 Cost of marriage after 15 years from now = 12 lacs. Balance corpus after adjusting marriage cost = 1592833 – 12 lacs = 392833 Total corpus at age 60 END N=15 I=12 PV= -392833 PMT= -90000 FV=Solve=5505370 Therefore the total corpus at age 60 = Rs.5505370 9) Current age of Mr. Sharma is 30 working with a private company fetching annual salary 600000 and it is increasing @ 10% p.a.. He decides to save 15% of his annual income at the end of every years till retirement age 60. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 91

He will require Rs.10 lacs for his son’s higher education after 10 years andrs. 12 lacs for his marriage after 15 years from now. How much corpus he would be able to accumulate at age 60 if roi 12%, inflation 5% Sol. Total accumulated corpus at age 60 fv= 1st PMT ((1−������)������−(1+������)������) (������−������) = 90000 ((1.12)30−(1.10)30) 0.12−0.10 = 56297339 Net corpus he will have at age 60 after adjusting education expenses and marriage expenses = 56297339 – 10 lac X (1.12)20 – 18 lacs x (1.12)15 = 36798628 10) Current age of Mr. Sharma is 30 working with a private company fetching annual salary 800000 and it is increasing @ 12% p.a.. He decides to save 20% of his annual income in the beginning of every year till retirement age 60. Current cost of higher education Rs.2 lacsp.a of 5 years higher education which will start after 16 years from now and current cost of marriage is Rs.18 lacs which will be performed after 22 years from now. How much corpus she would be able to accumulate at age 60 if roi 11%, inflation 6% p.a. Sol. Net present value of future saving Set = begin N=30 I=(11-12)/1.12 Pmt=-800000 x 0.2 PV=Solve=5483112 Net present value of education cost and marriage cost Using cash function I=(11-6)/1.06 1 to 16 = 0 17 = 200000 18=200000 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 92

19 = 200000 20 = 200000 21 = 200000 22 = 0 23 = 1800000 NPV=solve=1090108 Net present value of saving after adjusting education cost and marriage cost = 5483112- 1090108 = 4393004 Therefore he will able to accumulate corpus at age 60 = 4393004 X (1.11)30 = Rs.10,05,65,956 11 ) X aged 30 decides to save Rs.50000 today in a scheme that generates 12% p.a. return and continue saving after every three years but increases his saving 20% after every three years. How much corpus he will be able to accumulate at age 61? Sol. Page 93 Using CASH function I – 12 50000 2-0 3-0 4- 50000 X 1.2 5-0 6-0 7- 50000 X (1.2)2 8-0 9-0 10- 50000 X (1.2)3 11- 12- 13-50000 X (1.2)4 14 15 16- 50000 X (1.2)5 17 18 19- 50000 X (1.2)6 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook

20- 21- 22- 50000 X (1.2)7 23 24 25- 50000 X (1.2)8 26 27 28- 50000 X (1.2)9 29 30 31- 50000 X (1.2)10g 32 - 0 NFV = Solve = 94716820 Therefore total accumulated corpus at age 60 = Rs.9471820 12) Mr. X has purchased a house today of worth Rs.50 lacs and got it financed 75% @ 12% p.a. reducing monthly for 20 years. Real estate is appreciating @ 20% p.a. if he sells his house after 7 years what return ( CAGR ) he would get? Sol. Cost of house = 50 lacs Amount that is financed = 75% of 50 lac = 37.5 lacs Self financed = 12.50 lac. EMI of loan need to be calculated CMPD End N=20 X 12 I=12 PV=3750000 Pmt= -41290.74 P/Y=12 C/Y=12 Now we will calculate the outstanding loan after 7 years Pm1=1 Pm2 =84 CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 94

Bal = solve = 3254656 Real Estate appreciation rate = 20% p.a. Cost of house after 7 years = 50 lac X (1.2)7 = 17915904 Rate of return Mr. X has got after selling house = 23.05% p.a. CMPD end N=84 I=25.65 PV= - 12,50,000 PMT= -41290.74 Fv = 14661248(17915904-3254656) P/Y=12 C/Y = 1 13) Mr. X has just started a project with borrowed capital of Rs. 1 cr today for 10 years @ 15% p.a reducing monthly, one year later he would again take loan of Rs.2 cr for the same project for 9 years @ 13% p.a. reducing monthly. If he winds up this project after 2 years from now in Rs.4 crore, what rate of return he would get? Sol. First loan of Rs. 1 cr. CMPD END N=10 X 12 I=15 PV=1 Cr. PMT=161334.95 P/Y=12 C/Y=12 Outstanding Balance after 2 years. MART PM1=1 PM2=24 Bal=8990321.159 Second loan of Rs. 2 Cr. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 95

CMPD END N=9 X 12 I=13 PV=2 Cr. PMT=-315071.75 P/I=12 C/Y=12 Outstanding loan after 1 year PM1=1 PM2=12 Bal=18746175.54 After 2 years since the project started he sold it in Rs. 4 Cr. Rate of return he would get = 80.72% p.a. CASH 1–0 2 to 13 = - 161334.95 14 – 24 = - 315071.75-161334.95=-476406.7 25 = (40000000-315071.75-161334.95-8990321.159-18746175.54)=11787096.6 IRR = Solve = 5.055 Return = 5.055 X 12% = 60.666% p.a. comp monthly we will make it effective CNVR N=12 I=60.666 Eff = Solve = 80.72% 14) Mr. X has started a project by investing Rs.15 lacs. He gets from the project end of 1 year nothing, Rs.1.5 lacs after 2 years, 3 lacs after 3 years, 5 lacs after 4 years and end of 5th year 1.2 times of investment. If the opportunity cost is 12 % p.a. how much return is deviating of this project from opportunity cost? Sol. By using CASH function we can calculate the IRR of the project. CFP Level 3 - Module 1 – Risk Management & Insurance Planning – Workbook Page 96