finance class

1. Abhinav Rajverma
Protecting Your Wealth

2. Topics: Protecting Your Wealth
1. Life Insurance
2. Health Insurance
3. Property Insurance
4. Liability Insurance
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3. Introduction
The need for both Life and Health Insurance arises from the
principle Protect Yourself Against Major Catastrophes.
Health Insurance
Protection to self and family against financially devastating
medical bills
Life Insurance
Protection to family if one dies
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Planning and Control
If you plan carefully enough, you can control your finances even
after your death.

4. The Importance of Insurance
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 Most of us avoid thinking about and planning for our deaths –
most of us do not seek out a life insurance policy.
 When you consider your need for insurance, you need to keep
in mind its purpose.
 An insurance policy spells out what losses are covered, what
the policy costs, and who receives payment.
Health Care Is Expensive
No incentive to economize
Medical care extremely sophisticated – drugs development
High malpractice insurance costs

5. Life Insurance
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Life Insurance is sharing financial consequences of risk by
paying a premium (risk pooling).
Nominee – beneficiary designated to receive the proceeds
Make no sense without a spouse/partner or dependents
You probably need life insurance if:
You have children
You have dependents
You own a business – business debt
Need Life Insurance?
How Much Do You Need?

6. How Much Do You Need?
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Earnings Multiple Approach
 Normally, five to fifteen times your gross salary is recommended
Most insurance companies will not insure an individual for more than
twenty times his or her annual income
The goal of this approach is to replace the primary breadwinner’s salary
for a predetermined number of years.
How Much Insurance One Needs
Step 1: Adjust the pre-incident salary down to compensate for the
reduction in household expenses = Target replacement salary (TRS)
Step 2: Get the appropriate interest rate (post-tax and inflation-adjusted)
Step 3: Calculate the Earnings Multiple for life insurance
Step 4: Calculate the life insurance needs = TRS * Earnings Multiple

7. Example: Life Insurance Needs
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Example: Current Annual salary = Rs. 10 lakh; Inflation-adjusted post-
tax return = 2%; Calculate the life insurance needs for 10 years for a
surviving family of three. Assume expenses for three is expected to reduce
by 20%.
Solution:
Step 1: Target replacement salary = Rs. 10 lakh * (1 – 20%) = Rs. 8 lakh
Step 2: Interest rate (post-tax and inflation-adjusted) = 2%
Expense coverage for 10 years
Step 3: Earnings Multiple for life insurance = 𝑛=1
10
1 + 2% −𝑛
Step 4: Life insurance needs = TRS * Earnings Multiple

8. Life Insurance Needs – Other Methods
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Financial Needs Approach
Short-term needs (+)
Long-term debts (+)
Family maintenance expenses (+)
Resources available to meet needs (-)
Human Life Value Approach
Human life value (or economic value of a life) is the present value of
the future earnings potential of that person.
The amount of insurance needed will equal how much the insured
person will earn until retirement.
Function of current after-tax income, income growth rates, an after-
tax future investment returns, remaining number of years the insured
person is expected to work

9. Example: Human Life Value Method
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Example: Mr. John aged 40 years, draws an annual salary of Rs. 10
lakh. His personal expenses are Rs. 4 lakh per annum that includes taxes,
insurance premium, etc. Assuming retirement age of 60 years and
expected rate of return being 8%, estimate human life value of Mr. John.
Solution:
Step 1: Surplus Income = Rs. 6 lakh per year
Step 2: Working Span = 20 years
Step 3: Get the PV of 20-year annuity = HLV
Net Rate for Growing Annuity =
(𝟏 + 𝒊)
(𝟏+ 𝒈)
− 𝟏

10. Life Insurance: Major Types
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Term Insurance
Protection for a specified time period
Least expensive; premium increases over time
Fixed death benefits
No cash value
Cash-value Insurance: Insurance + Saving
 Whole Life Insurance
 Unit Linked Insurance Plan (ULIP*)
 Child Plan
 Endowment Plan
 Money Back Plan
 Retirement Plan
 Group Insurance Plan
*CG tax on any income if Annual Premium is more than Rs. 2.5 lakh

11. Important Clauses
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Contract Clauses
 Free Look Period
 Grace Period
 Revival clause
 Loan Clause
 Payment Premium Clause
 Suicide exclusion
Life assured dies by suicide within 12 month
 Reasonability clause
Reasonable charges in the same geographical area for
similar or identical service
 Indisputability clause
Ensures that insurers do not arbitrarily dismiss claims on
grounds of inaccurate declaration by the policyholder

12. Riders and Payout Options
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Riders: Enhanced protection and coverage benefits
 Accidental Death Benefit
 Permanent Disability
Waiver of Premium
 Critical Illness
 Accelerated Death Benefit
 Income Benefit
Payout Options
 Lump sum payout
 Periodic Payouts
Lump sum payout with regular income
Lump-sum payout with increasing income
Which settlement should you choose?

13. Health Insurance
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Health insurance is a contract where an insurance company
provides medical coverage. Medical coverage includes
hospitalization, surgeries, day care procedures, etc.
Major Types
 Individual Health Insurance
 Family Floater
 Senior Citizen
 Critical Illness

14. Property Insurance
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Property insurance provides protection against most risks to
property, such as fire, theft and some weather damage.
Need to prepare for unlikely, unlucky events.
How much and what kind of insurance to buy is a challenge.
Types of Insurance Coverage
 Replacement cost
Repairing or replacing property at the same or equal value
 Actual cash value
The replacement cost minus depreciation
 Extended replacement cost
More than the coverage limit if the construction costs have gone up

15. Liability Insurance
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Liability insurance provides protection against claims resulting from
injuries and damage to other people and/or property
Legal costs and payouts – insured party would be found liable.
Not covered: Intentional damage, contractual liabilities, criminal prosecution
Liability insurance a must for vehicle insurance policy
Types of Liability Insurance
 General Liability
Bodily injury and property damages
Reputational harm; Advertising errors
 Professional Liability
Negligence; Misrepresentation
Violation of good faith and fair dealing
 Employer Liability
Workers’compensation if employees get injured or sick because of their job
 Product Liability
 Third-Party Liability

16. Summary
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 Life insurance controls the financial effect on your family
when you die.
 There are two types of life insurance – term and cash-value.
 Basic health insurance provides combination of hospital,
surgical, and physician expense insurance.
 Major medical expense insurance covers medical costs not
covered by basic health insurance.
 Property insurance and liability insurance

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