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Formula sheet/NISM Series X-B: Investment Adviser (Level 2)/Risk Management and Insurance Planning
[ RISK MANAGEMENT AND INSURANCE PLANNING ]

Insurance Policies: Inherent Returns, Paid-Up Value & Health Deductibles

Inherent Return on Endowment / ROP Plans: =RATE(n, -[Premium_endow - Premium_term], 0, Maturity Proceeds)
Paid-Up Sum Assured:Original Sum Assured×(Number of Premiums Paid/Total Premiums Payable)\text{Paid-Up Sum Assured}: \text{Original Sum Assured} \times ( \text{Number of Premiums Paid} / \text{Total Premiums Payable} )
Net Health Claim Settlement:Net Claim Paid=min(Sum Insured,[Claim Amount−Deductible]×[1−Co−Pay%])\text{Net Health Claim Settlement}: \text{Net Claim Paid} = min( \text{Sum Insured}, [ \text{Claim Amount} - Deductible ] \times [ 1 - Co-Pay \% ] )
Top-Up vs.Super Top-Up:Top-up applies deductible per individual claim;Super Top-up applies deductible against cumulative annual claims.\text{Top-Up vs}. \text{Super Top-Up}: \text{Top-up applies deductible per individual claim}; \text{Super Top-up applies deductible against cumulative annual claims}.
Variables

Traditional endowment plans typically yield an inherent return of 4-5% p.a., lagging inflation over long holding horizons.

Worked examples
Human Life Value (HLV) Calculation using Real Discount Rate

A 33-year-old software architect earns an annual income of Rs 10,00,000 dedicated to family support and plans to retire at age 60 (27 working years left). The expected investment return on capital is 8.0% p.a., and expected long-term inflation is 6.0% p.a. Compute the Real Discount Rate and Human Life Value (HLV).

Needs-Based Life Insurance Sizing with Existing Debt & Assets

A 45-year-old individual provides for his 40-year-old wife (life expectancy 80 years, 40 years to provide for). Current annual family living expenses are Rs 6,00,000. Expected investment return is 8.0%, inflation is 6.0% (Real Rate = 1.8868%). The client has an outstanding home loan of Rs 30,00,000, existing term life cover of Rs 50,00,000, and liquid financial assets of Rs 20,00,000. Calculate additional life insurance required.

Inherent Return on Endowment & Return of Premium (ROP) Plans

A 30-year-old is considering a 20-year Return of Premium (ROP) Term Plan with Sum Assured of Rs 1.00 Crore. Annual premium for pure term plan = Rs 12,000; Annual premium for ROP plan = Rs 32,000 (Extra premium = Rs 20,000/yr). At maturity (Year 20), the ROP plan returns all premiums paid (20 × Rs 32,000 = Rs 6,40,000). Calculate the internal rate of return (IRR) earned on the extra premium.

Paid-Up Sum Assured on Lapsed Traditional Life Policy

An insured bought a 20-year traditional endowment policy with Sum Assured of Rs 10,00,000 and annual premium of Rs 50,000. After paying 6 annual premiums, he is unable to pay further premiums and converts the policy into a Paid-Up policy. If the insurer has accrued bonuses of Rs 80,000 over the 6 years, calculate the Paid-Up Value payable on death or maturity.

Health Insurance Co-Pay & Deductible Claim Settlement

An individual holds a health insurance policy with Sum Insured of Rs 5,00,000, an initial Deductible of Rs 25,000 per claim, and a 10% Co-Payment clause on admissible claims. The patient incurs a total hospital bill of Rs 2,75,000 (including Rs 15,000 for non-medical expenses disallowed by insurer). Calculate the amount paid by the insurance company and the out-of-pocket payment by the insured.

Top-Up vs. Super Top-Up Health Policy Claim Settlement

An insured holds a Base Health Policy of Rs 3 Lakhs and a secondary policy of Rs 10 Lakhs with a Rs 3 Lakh Deductible. During the year, she incurs 3 hospital claims: Claim 1 = Rs 2 Lakh, Claim 2 = Rs 3 Lakh, Claim 3 = Rs 4 Lakh (Total = Rs 9 Lakhs). Calculate total reimbursement and out-of-pocket expenses under: (Case A) Top-Up Policy, (Case B) Super Top-Up Policy.