Life insurance is a big purchase, and you want to be sure that you’re getting the most out of your investment. In 2020, the US was the leading life insurance premium writing country, with a total value of direct life premiums written exceeding $630 billion. It shows the massive demand for life insurance products in the United States.
When you decide if life insurance is the right choice for you, the internal rate of return or IRR is among the most important things to consider. A life insurance IRR calculator can help you determine whether or not an individual life insurance policy offers a good return on investment.
Keep reading for more information about using this calculator and what to keep in mind when deciding.
What Is the IRR Calculator, and How Does It Work?
The life insurance IRR calculator is a tool that one can use to determine the internal rate of return (IRR) for a life insurance policy. The IRR is nothing but the discount rate that makes the net present value (NPV) of all cash flows from the policy equal to zero.
A life insurance policyholder would earn the rate of return if they held the policy to maturity and received all of the death benefits and other cash values paid out over the policy’s life.
The calculator works by inputting information about the life insurance policy, such as the face value, premium payments, cash value growth rate, and mortality rate.
Face Value: This is the amount the policy will pay out upon the insured’s death.
Assuming a face value of $500,000, this would be the payout to the beneficiaries upon the policyholder’s death.
Premium Payments: These are the periodic payments made by the policyholder to keep the policy active.
Cash Value Growth Rate: This is the rate at which the policy’s cash value grows.
Mortality Rate: This is when policyholders of a particular age and gender die. The calculator then uses this information to calculate the IRR of the life insurance policy.
What Are the Benefits of Using an IRR Calculator?
1. Helps You Understand the Cash Flow of a Life Insurance Policy
The calculator helps you understand the cash flow of a life insurance policy. It is essential because it can help you make informed decisions about whether or not to keep the policy.
2. Easier to Compare Different Policies and Make an Informed Decision
It is essential and practical to have a clear understanding of what each policy entails before deciding. An IRR calculator can help make this process much more manageable. By inputting the relevant information for each policy, you can see a direct comparison of the two policies and make an informed decision. IRR calculators can be found online and are typically very user-friendly.
3. Can Help You Save Money on Your Premiums
The calculator can help you see how different premium payment options can impact your overall return. It can help you find ways to save money on your premiums.
It would be helpful to consider these few things when using an IRR calculator for life insurance purposes. First, make sure that the assumption of the cash value growth rate is realistic. Second, remember that taxes and expenses will reduce the actual IRR achieved.