Archive / Investment Adviser (Level 2) / Life Insurance Products
nism-series-xb-human-life-value-real-discount-rate-calculation[ INVESTMENT ADVISER (LEVEL 2) ]
A 35-year-old software architect earns an annual income of ₹12,00,000 dedicated to family support and intends to retire at age 60 (25 working years left). The expected investment yield is 8.0% p.a. and long-term inflation is 5.5% p.a. What is the Real Discount Rate and the calculated Human Life Value (HLV)?
[ A ]Real Rate = 2.50%; HLV = ₹2,21,08,500
[ B ]Real Rate = 2.37%; HLV = ₹2,24,42,455[ CORRECT ]
[ C ]Real Rate = 8.00%; HLV = ₹1,28,09,700
[ D ]Real Rate = 0.00%; HLV = ₹3,00,00,000
Takeaway
Real Discount Rate = (1.08 / 1.055) - 1 = 2.3697%. HLV = ₹2,24,42,455 (approx ₹2.24 Crore).
Derivation
The exact real discount rate uses the Fisher division, not simple subtraction: r_real = [(1 + r_inv) / (1 + r_inf)] − 1 = (1.08 / 1.055) − 1 ≈ 0.0236967, or 2.3697%. Discounting the ₹12,00,000 annual family dependency stream over 25 years at this exact real rate: Annuity Factor = [1 − (1.0236967)^−25] / 0.0236967 ≈ 18.70205. HLV = ₹12,00,000 × 18.70205 ≈ ₹2,24,42,455. Using the tempting shortcut of 8.0% − 5.5% = 2.5% instead of the exact 2.3697% real rate produces a distorted HLV roughly ₹3.33 Lakh lower, which matters because life insurance sizing is typically rounded to the nearest sum-assured band, so even a small rate error can shift the recommended cover amount.
Why the others fail
A — Real Rate = 2.50%; HLV = ₹2,21,08,500
Uses simple subtraction (8.0% - 5.5% = 2.50%) for the real rate instead of the exact Fisher division, which produces a real rate of 2.3697%, not 2.50%.
C — Real Rate = 8.00%; HLV = ₹1,28,09,700
Discounts using the full nominal investment return of 8.0% without adjusting for inflation at all, which severely under-insures the family's real future needs.
D — Real Rate = 0.00%; HLV = ₹3,00,00,000
Assumes a zero real rate and simply multiplies annual dependency by 25 years, ignoring both inflation adjustment and the time value of money entirely.
Related questions
nism-series-xb-macaulay-duration-vs-modified-duration-formulaInvestment Adviser (Level 2)
How to Convert Macaulay Duration to Modified Durationnism-series-xb-hlv-when-income-growth-equals-investment-returnInvestment Adviser (Level 2)
What Happens to Human Life Value When Income Growth Equals Investment Returnnism-series-xb-real-discount-rate-8-percent-return-6-percent-inflationInvestment Adviser (Level 2)
Finding the Real Discount Rate for Adil's Insurance Needs Calculation