INSURANCE

1. 1.5 cr spent on furniture, 30 lakhs spent on 50 computer workstations, both are fully insured in
the first year. In the 2nd year insurance is taken with depreciation of 15% on furniture and 25% on
computer workstations on written down values. In the mid 2 nd year because of fire damage
occurred. In the 2nd year there is an escalation of 10% in furniture cost & 50000/computer station is
the value. The claim would be equal too?
a) 1.59 cr
b) 1.50 cr
c) 1.40 cr
d) 1.54 cr

Solution: A
No method given.
Market value Basis = CMP- Depriciation

Furniture Cost: 1,50,00,000*1.10 = 1,65,00,000

Less Depr. 15%: 1,65,00,000*15%= -2475000
Furniture = =1,40,25,000

Cost of 50 Computers WS: 50,000*50= 25,00,000

Less Depr. 25%: 25,00,000*25%= -6,25,000
Computer = = 18,75,000

Total Value: 14025000+18,75,000 = 1,59,00,000

2. A with profit participating policy, 50/1000 sum assured bonus as per the historical data has a
differential of Rs. 25/1000 sum assured from the term policy. Term Policy is for 20 years, Sum
Assured – 10 Lakh and Premium 6540/Year. Client paid 18th premium in the “with profit plan”.
Evaluate the differential returns from with profit in case of mortality today @ 8% investment return

a) Return on with profit policy is lower by 3.79%

b) Return on with profit policy is lower by 1.78%
c) Return on with profit policy is lower by 3.34%
d) Return on with profit policy is lower by 1.10%

Solution: d

Price differential in premium 25 Rs.

per thousand
Price differential in premium 25,000 Rs. 25*1000000/1000
for a Rs. 10 lakh policy
Estimated bonuses on maturity 900,000 Rs. 50*18*1000000/1000
of with profit policy
Rate expected on maturity 6.90% p.a. Set : B, n : 18, PV : 0,
proceeds PMT : -25000, FV :
900000, P/Y:1, C/Y:1, I
= solve
Return differential from 8% p.a. -1.10% p.a. 6.90% - 8%

3. A company has insured its plant for 12cr with Insurer A & B in equal ratio. Due to fire it suffered
damage and got 8cr claim from insurer B, which is tenable?

a) B getting a reimbursement of 4cr from A

b) A reimburses B Rs. 2cr & settling claim of 4cr of the company
c) The company seeking a claim of 8 cr from A as well
d) The company seeking a claim of 4cr from A

Solution:
Plant 12 cr.
Insurance with A and B: 50% each
Plant damage 8 cr. Settled by B
So, B will get 4 Cr. Reimbursed from A

4. The factory was made 6 years ago for 80 lakhs. The construction cost is increasing at 8% per
annum. Depreciation is at 6%/annum using Straight Line Method. What value is likely to be insurable
under fire on MVB

a) 87.5 Lakhs
b) 81.2 Lakhs
c) 1.27 cr
d) 75.7 Lakhs

Solution: b

Market Value Basis = CMP – Depreciation (on CMP)

Calculation of CMP of factory construction

Set Begin
N 6
I 8
PV -8000000
PMT 0
FV Solve= 12694994.58
P/Y 1
C/Y 1
MVB = CMP – Depreciation (on CMP)

= 12694994-[(12694994.58*6%)*6]

=12694994-4570198.049

= 8124795.951

5. A 20 year endowment plan with premium of 26147/year and Sum Assured of 10 Lakhs. 15
premiums have been paid and have 825000 towards declared bonuses. The client does not want to
continue the policy. He can opt for Paid up or surrender value. The surrender value factor is 75% of
Paid Up Value. What returns 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%

Solution: D

Calculation of Paid Up Value Calculation of Surrender Value

Particulars Amount Particulars Amount (INR)
(INR) Paid up value 15,75,000
No. of premiums paid (a) 15 (x) SV Factor (x) 75%
Total no of premiums (b) 20 Surrender Value 11,81,250
Sum Assured (c) 10,00,000
Bonus (d) 8,25,000
Paid Up Value (e) = [(a/b) x c ] + d 15,75,000

Calculation of return Mr. X would earn on the surrender value to offset the paid up value
Particulars Amount (INR)
Set Begin
N = 20-15 5
I% ? (Solve = 5.92)
PV(15) = Surrender Value -11,81,250
PMT 0
FV(20) = Paid Up Value 15,75,000
P/Y & C/Y 1,1 (respectively)

6. 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 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 child & such life expenses @ 40% for
souse’s 30 years survival. Inflation is 5.5% and Return is 9.5%
a) 109 Lakhs
b) 101 Lakhs
c) 106 Lakhs
d) 91 Lakhs

Solution : d

Step 1 (Family expenses)

Set Begin
N 5*12
I (9.5-5.5)/1.055
Pv Solve (1919175.483)
Pmt 35000
Fv 0
p/y 12
c/y 1

Step 2 (for spouse) inflating expenses

Set Begin
N 5
I 5.5
Pv 35000*40%
Pmt 0
Fv Solve (18297.44)
p/y 1
c/y 1

Step 3 (for spouse) finding corpus

Set Begin
N 30*12
I (9.5-5.5)/1.055
Pv Solve (3974341.685)
Pmt 18297.44
Fv 0
p/y 12
c/y 1

Step 4 (for spouse) discounting the corpus as on date

Set Begin
N 5
I 9.5
Pv Solve (2524311.79)
Pmt 0
Fv 3974341.685
p/y 1
c/y 1

Step 5 (for child)

Set Begin
N 5
I 9.5
Pv Solve (3176138.326)
Pmt 0
Fv 5000000
p/y 1
c/y 1

Step 6(insurance required)

ADD: Family Expenses 1919175.483
ADD: Spouse’s Expenses 2524311.79
ADD: ChildEducation 3176138.326
ADD: Loan Liability 4200000
LESS: Assets 2700000
Additional requirement 9119625.599

7. A participating policy of 20 years with sum assured of 5 lakhs has Revisionary Bonus of 50/1000
SA for the first 4 years, 55/1000 SA in the next 10 years and 60/1000 SA in the remaining years. The
maturity bonus is also declared at 115/1000 SA. At a Premium of 31356/ year, find the effective
return?

a) 5.19%
b) 11.19%
c) 7.74%
d) 4.73%

Solution: a

Calculation of Bonuses received at Maturity

1st 4 years (50/1000*500000*4) 100000
Next 10 Years (55/1000*500000*10) 275000
Last 6 years (60/1000*500000*6) 180000
Maturity Bonus (115/1000*500000) 57500
Total Bonus 612500

Maturity Benefits = SA + Bonus

=500000 + 612500 = 11,12,500

Calculation of rate of return

Set Begin
N 20
I Solve= 5.19
Pv 0
Pmt -31356
Fv 1112500
p/y 1
c/y 1

8. A client has a cash asset of 70 Lakhs, a housing loan of 52 lakhs. 6 years hence wants 1 cr to set up
child business and 10 years hence wants 50 Lakh 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) 185 Lakh
b) 299 Lakh
c) 144 Lakh
d) 162 Lakh

Solution : a

Step 1 for Child Business

Set Begin
N 6
I 11
Pv Solve= -5346408
Pmt 0
Fv 10000000
p/y 1
c/y 1

Step 2 for Daughters marriage

Set Begin
N 10
I 11
Pv Solve= -1760922
Pmt 0
Fv 5000000
p/y 1
c/y 1

Step 3 for Expenses of family and spouse

Set Begin
N 45*12=540
I (11-7)/(1+7%)
Pv Solve= -13233616
Pmt 50000
Fv 0
p/y 1
c/y 1

Insurance Needed:
For Child Business 5346408
For Daughters Marriage 1760922
For Expenses of family and spouse 13233616
Add Housing Loan 5200000
Less Cash Asset (7000000)
Insurance Required 18540946

9. 20 years moneyback policy with 2 Lakh as sum assured was purchased on 2nd June 1996 @ 13028
premium. 20% paid back on the 5th, 10th and the 15th year. Last Premium paid was on the 11th june
2011. Bonus on may 2012 was 107814. The client dies on the 9th of June 2012. How much would be
the death Claim?

a) 374786
b) 307814
c) 294786
d) 174786

Solution: c

Death Claim = SA + Bonus - Unpaid Premium

= 200000+107814-13028
= 294786

Note = Premium was due on 2nd june 2012, but he died on 9th june 2012 without paying the
premium( In the question, it is given, the last premium paid was on 11th june 2011.). But it was
within grace period, So unpaid premium will be deducted from Death claim.

10. A family has an expense of 30000/month. The bread earner accounts for 20% of it. Find the
human life value for 30 years of inflation adjusted expenses if inflation is 6%, return is 9%

a) 60 Lakhs
b) 73 Lakhs
c) 31 Lakhs
d) 41 Lakhs

Solution : a

Set Begin
N 30*12
I (9-6)/(1+6%)
Pv Solve= 5858967
Pmt -24000 (80%*30000)
Fv 0
p/y 12
c/y 1

11. A family has an expense of 48000/month. The bread earner consumes 25%. Find human life
value for 15 years of living expenses for the family and 30 years expenses for his spouse reduced to
50% after the initial period. Expenses are adjusted for inflation at 5% and return is 7.5%. What is the
life cover required to be taken?
a) 151 Lakhs
b) 120 Lakhs
c) 116 Lakhs
d) 87 Lakhs

Solution : d

Step 1
Set Begin
N 15*12
I (7.5-5)/1.05
Pv Solve (5465236.899)
Pmt 48000*75%
Fv 0
p/y 12
c/y 1

Step 2
Set Begin
N 15
I 5
Pv 36000 (48000*75%)
Pmt 0
Fv Solve (74841.41446)
p/y 1
c/y 1

Step 3
Set Begin
N 30*12
I (7.5-5)/1.05
Pv Solve (9672370.359)
Pmt 74841.41446*50%
Fv 0
p/y 12
c/y 1
Step 4
Set Begin
N 15
I 7.5
Pv Solve (3268932.506)
Pmt 0
Fv 9672370.359
p/y 1
c/y 1

Step 5 = 1+4 = 5465236.899+3268932.506 = 8734169.405

12. There is a 15 years with profit policy at a premium of 8843 a year. Sum Assured is 100000,
Revisionary Bonus = 40/1000 SA, Terminal Bonus = 110/1000 SA. A term insurance policy is available
for 2515. Find the investment component return
a) 6.29%
b) 5.34%
c) 3.11%
d) 7.06%

Solution: d

Maturity Benefits = SA + RB + TB
= 100000 + 60000(40/1000*100000*15) + 11000(110/1000*100000)
= 171000
Investible Premium = 8843 -2515
= 6328

Set Begin
N 15
I Solve= 7.0578
Pv 0
Pmt -6328
Fv 171000
p/y 1
c/y 1

13. A client has a car loan of 10 lakhs with an EMI of 21494/m @ 10.5% and 2 years left for the loan.
He also has a personal loan of 3.2 lakhs with an EMI of 11569/m @ 18% and 2 years left. He receives
a sudden inflow of 7 lakhs which he can put in 10% FD for 2 years. Will you advice to repay the loan
& invest the EMI systematically every month in a tax efficient instrument @ 9%?
a) Yes the accumulated amount after 2 years would be more by atleast 20,000 with lower tax than
FD
b) No, FD maturity will be 8,47,000 against total outflow of 7,93,500 in 2 years in loan
c) No the FD interest would be 1,47,000 where as he may save 98,000 in interest
d) Not nice to leave 10% for 9%

Solution: a

Find outstanding loan amount for Car and personal loan

Car Loan Personal Loan

Set END END
N 2*12 2*12
I 10.5 18
Pv Solve=463472.0696 Solve=231731.7597
Pmt -21494 -11569
Fv 0 0
p/y 12 12
c/y 12 12

Total Outstanding Loan = 463472.0696 + 231731.7597 = 695203.8293

Option A: Repay both the loans and invest money saved through not paying EMIs

Amount available 700000

Less Outstanding Loans 695204
Balance remaining for Investment 4796

Set Begin
N 2*12
I 9
Pv -4796
Pmt -(21494+11569)
Fv Solve= 874810.6835
p/y 12
c/y 1

Option B : Continue with loans and Invest 7 lacs in FD

Set Begin
N 2
I 10
Pv -700000
Pmt 0
Fv Solve= 847000
p/y 1
c/y 1
Option A is more profitable, hence would advice to repay both the loans and invest the EMI’s.

14. A client has a car loan of 10 lakhs with an EMI of 21494/m @ 10.5% and 2 years left for the loan.
He also has a personal loan of 3.2 lakhs with an EMI of 11569/m @ 18% and 2 years left. He receives
a sudden inflow of 4 lakhs, which he uses to pay the loan off. What will be the revised net worth if
she systematically invests the EMI @ 8 – 10% for the remaining 2 years?

Solution:

Find Outstanding loan amount for Car and personal loan

Car Loan Personal Loan

Set END END
N 2*12 2*12
I 10.5 18
Pv Solve=463472.0696 Solve=231731.7597
Pmt -21494 -11569
Fv 0 0
p/y 12 12
c/y 12 12

Amount Received 400000

Pay Off personal Loan 231731.75
Balance Left 168268.25
Full Balance is used to pay off Car Loan 168268.25
Amount Left 0

Car Loan Outstanding 463472.0696

Less bal used to pay off car loan 168268.25
New Outstanding car loan 295203.8196

Calculate revised EMI of Car Loan

Set END
N 2*12
I 10.5
Pv 295203.8196
Pmt ?= -13690
Fv 0
p/y 12
c/y 12

Old Car Loan EMI 21494

Old Personal Loan EMI 11569
Total Outflow 33063
Less New Car Loan EMI (13690)
Amount available for investment 19373

Calculation of Net worth

 8% 9% 10%
Set Begin Begin Begin
N 2*12 2*12 2*12
I 8 9 10
Pv 0 0 0
Pmt -19373 -19373 -19373
Fv ? = 504257.56 ? = 509249.42 ? = 514258.74
p/y 12 12 12
c/y 1 1 1

15. A training institute bought 100 computers at a total cost for Rs. 40, 00,000. These computers
came into option on 1st April’12. The cost of a similar new computer declined to Rs. 35000. The
industry norm of the depreciation charged on computers is 30% on Written down value basis. At
what appropriate value he should set up next due date 1st April’13.

a) Rs 28,00,000
b) Rs 35,00,000
c) Rs 24,50,000
d) Rs 31,50,000

Solution: c

Market Value Basis = CMP – Depreciation ( on CMP)

= (35000*100) - (35,00,000*30%)

=24,50,000

16. Mr. A has a gross salary of Rs 9,00,000 of which he saves 30% which includes EPF deduction, PPF
and monthly systematic investment in long term mutual fund scheme. Another 30% goes towards
servicing of housing and car loans and taxes. His Financial Planner advises him accumulate 6 month
household expenses in liquid funds. He changes job and expects immediate rise of 20% in his gross
income. You estimate that other heads would not change materially except his household expenses
which would rise by 5% due to child education. How many months he would take to accumulate
liquid reserves?
a) 14 months
b) 13 months
c) 25 months
d) 11 months

Solution: a
Gross Salary 9,00,000
EPF/PPF/Monthly investments 900,000*30% 2,70,000
Loan Servicing 900,000*30% 2,70,000
Balance is Household expenses 900000-270000-270000 3,60,000
Revised Salary 900000*(1+20%) 10,80,000
EPF/PPF/Monthly investments No Change 2,70,000
Loan Servicing No Change 2,70,000
Revised Household expenses 360000*(1+5%) 3,78,000
Balance is Savings 1080000-270000-270000-378000 1,62,000

Amount to be invested in liquid fund = 378000 – 12 months therefore for 6 months = (378000*6)/12
= 189,000
Rs. 162000 accumulated in 12 months therefore, months required to accumulate Rs 189000 =
(189000*12)/162000 = 14 months.

17. A businessman bought a piece of land in March 2002 for Rs 1 cr. He got a factory built on the
land at a cost of Rs 1.2 cr, the factory become operational on 1st Sep 2005. The land piece has
appreciated 8% p.a. The construction cost has escalated at 10% p.a. since 2005. At what value the
factory should be insured in April 2013 on market valve basis if the depreciation on factory premises
is charged 6% p.a. on straight line method basis.
a) 1.67 crore
b) 1.34 crore
c) 2.30 crore
d) 2.55 crore

Solution: b

Market Value Basis = CMP – Depreciation (on CMP)

Calculation of CMP of factory construction

Set Begin
N 2013-2005 =8
I 10
PV -12000000
PMT 0
FV Solve= 25723065.72
P/Y 1
C/Y 1

MVB = CMP - Depreciation (on CMP)

= 25723066-[(25723066 *6%)*8]

=25723066 - 12347072

= 13375994

18. 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.

Solution: a
Option A gives return of 7.998
Set : Begin
N = 20
I = Solve [7.998]
Pv = -10000000
Pmt = 943000
Fv = 0
p/y = 1
c/y = 1

Option B gives return of 7.53

Set : Begin
N = 25
I = Solve [7.53]
Pv = -10000000
Pmt = 837000
Fv = 0
p/y = 1
c/y = 1

Option C gives return of 7.8515

Set : Begin
N = 25
I = Solve [7.8515]
Pv = -10000000
Pmt = 728000
Fv = 10000000
p/y = 1
c/y = 1

19. Mr. took a personal loan of Rs 2lakh at 14.5%pa interest, tenure 2yrs on the credit card. The
card company has also charged possessing fees of 1.5% on the loan amt. the interest is charged on
monthly reducing bal. what is the effective interest paid?
a) 16.04% pa

b) 17.28% pa
 c) 13.79% pa

d) 15.25% pa

Solution : b

Loan amount 200000

Rate 14.50%
Term in years 2
Processing fee 1.50%
Processing fee Charged
3000 2,00,000 * 1.5%
upfront
Effective loan amount 197000 2,00,000 - 3,000
EMI $9,649.89 Find PMT? Rate = 14.5%/12, Nper = 2*12, PV = 200000
Rate 1.34% Find Rate? Nper = 2*12, PV = 197000, EMI = - 9649.89
Annual Rate 16.04% Answer * 12
Annual Effective Rate 17.28% Find EFF, Nper = 12, Rate = 16.04%

20. Mr. A purchases a flat at Rs 35 lakhs in Oct 2006. A loan of Rs 20lakhs for 15yrs@ 8.5% pa,
registration 2 lakhs, statutory expense and furniture Rs 3 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.
a) 60 lakhs
b) 69 lakhs
c) 65 lakhs
d) 55 lakhs

Solution: a

Step 1 – Calculate EMI of Home Loan

Set END
N 15*12
I 8.5
PV 2000000
PMT Solve = -19694.79
FV 0
P/Y 12
C/Y 12

Calculate O/s Balance as on Oct 2012 i.e. after 6 years (Oct 2006 –Oct2012)
Set END
PM1 1
PM2 6*12
Bal Solve = 1483113.793

Calculate the amount towards taxes and other cost to be discharged on selling unit
= 12% of Appreciation value
=12% *(8000000-3500000-500000)
=12%*4000000
=4,80,000

Calculate Home Equity

Home Equity = Current Market value – Outstanding loan – 12% of Appreciation Value
= 80,00,000 – 14,83,114 – 4,80,000
= 60,36,886

21. An electronic shop on leased has taken insurance of goods housed for value of Rs 1.3 crore. The
surveyor assured the average value of goods storable in the shop at Rs 1.5 crore. The stock taken on
year ended 31st march 2012 valued the goods at landed cost of Rs 1.2 crore. On 7th April 2012 the
shop was completely over fire. The shop as per sales record sold goods for Rs 25 lakhs making profit
of Rs 4 lakhs. What will be the amount of claim?
a) 85.80 lakhs
b) 1.20 crore
c) 82.33 lakhs
d) 1.16 crore

Solution: a

1. Cost price of goods sold = Selling Price – Profit = 2500000-400000 = 2100000

2. Goods destroyed = value of goods on 31st march 2012 Less cost of goods sold
=12000000-2100000 = 9900000
3. This is a case of underinsurance. So Principle of Average will be applied.
Amount of claim = SA / Value of goods *Loss
=1,30,00,000/1,50,00,000*99,00,000 = 85,80,000

Theory Questions

1. An agent qualifies under which section of Insurance act?

Solution : u/s 42

2. An insurance agent hold license for life and general insurance is known as _____
a. Composite broker
b. Direct Broker
c. Reinsurance Broker

Solution: a
 Composite Agent means an insurance agent who holds a license to act as an insurance agent for a
life insurer and a general insurer.

3. The motor insurance has a cover note valid for ____ days?
a. 60 days
b. 45 days
c. 25 days
d. 15 days

Solution: a

4. In insurance TPA parlance means?

Solution: A third-party administrator (TPA) is an organization that processes insurance claims or

certain aspects of employee benefit plans for a separate entity.

5. The limit for composite broker is?

Solution: Limit of indemnity for any one claim and in the aggregate for the year in the case of
insurance brokers shall be as follows :

Category of insurance Limit of indemnity

broker

(a) Direct broker three times remuneration received at the end of every financial year
subject to a minimum limit of rupees fifty lakhs.

( (b) Reinsurance broker three times remuneration received at the end of every financial year
subject to a minimum limit of rupees two crores and fifty lakhs.

(c) Composite broker three times remuneration received at the end of every financial year
subject to a minimum limit of rupees five crores

6. Limit for minimum amount of capital as mentioned below:

Category Minimum amount (Rupees)

(a) Direct broker fifty lakhs

(b) Reinsurance broker two hundred lakhs

(c) Composite broker two hundred and fifty lakhs

7. Which type of insurance is not easily available in India?

a. Officer’s liability
 b. Health
c. Life
d. Disability income protection

Solution : a