Insurance Mathematics and Basic Financial Planning
Expect a handful of calculation questions plus conceptual ones on how premiums and financial plans are built. Memorise the formulas and practise one clean computation per concept.
The maths the exam uses
- Future value: FV = PV(1 + r)^n; present value: PV = FV ÷ (1 + r)^n.
- Annuity future value: FV = P × [((1 + r)^n − 1) ÷ r]; present value of an annuity: PV = A × [1 − (1 + r)^−n] ÷ r.
- Rule of 72: doubling time ≈ 72 ÷ rate; use 114 for tripling.
- Real return: (1 + nominal) ÷ (1 + inflation) − 1.
- Premium build-up: risk (mortality) cost + expense loading + savings − investment return = gross premium. Mortality charges rise with age, so level premiums build reserves in early years.
- Human Life Value: present value of future income net of taxes and self-maintenance. Needs approach: income replacement + liabilities + education fund − existing assets and cover.
- Financial planning: risk profile, asset allocation, emergency fund, protection before investment, inflation-adjusted goals.
Worked example
Age 30, income ₹6,00,000, retirement at 60, discount rate 6%. Annuity factor = [1 − 1.06^−30] ÷ 0.06 = (1 − 0.1741) ÷ 0.06 = 13.76. HLV = 6,00,000 × 13.76 ≈ ₹82.6 lakh. Add liabilities ₹20 lakh and education ₹15 lakh, subtract existing cover ₹30 lakh and savings ₹10 lakh: recommended cover ≈ ₹77.6 lakh. Growing income in real terms would raise this figure.
Traps
Discounting at a nominal rate while also inflating income - double counting. Using the rule of 72 for tripling. Confusing simple with compound interest. Substituting premium for sum assured. Quoting projected ULIP returns as planning certainties.