Internal Rate of Return calculator for Life Insurance

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"Is a given life insurance policy a good investment?

The best way to measure life insurance as an investment is to calculate its Internal Rate of Return (otherwise known as IRR).

What IRR calculates is what the annual return of a given investment is. Investors wants to have the highest possible return on investment. But with interest rates at historical lows it is extremely difficult to generate an meaningful rate of return "risk free"

Many life insurance policies in Canada offer guarantee premiums and pay periods – therefore the only variable is at what point in time your beneficiary will receive your TAX FREE benefit.

Permanent Life insurance allows policyholders to protect their family in the short run and enjoy the benefits of a risk free long term investment. Returns rarely fall below five per cent and best of all money is paid out TAX FREE. (The calculator is designed for Permanent plans with a level premium)

Client age:
Coverage amount:
Annual premium:
Number of annual payments:
life insurance testimonials
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32 Comments

  1. tamara 11/21/2008 at 3:52 pm

    What useful tool this is !!!

  2. LSM Insurance 11/21/2008 at 7:32 pm

    Thanks Tamara – I appreciaite the kind word. If we can help out further please let me know.

    Regards … Lorne

  3. Wilson 11/24/2008 at 9:32 pm

    How much is a $100,000 of life insurance for a 51 year old male and is there a waiting period until it pays out?

    Thanks!

  4. LSM Insurance 11/24/2008 at 9:44 pm

    Hi Wilson,

    Thanks for your question. You can get an instant quote from the following link link to lsminsurance.ca

    A 51 year old male non smoker would pay the following premiums

    $100,000 Term 100 coverage – $1184.00 a year
    -level premiums for life

    $100,000 20 Pay – $1752.00 a year
    -level premiums and policy is paid up after 20 years

    The IRR on the Term 100 policy would be
    8.43% at age 76
    6.04% at age 81

    Traditional life insurance policies pay out from Day 1. Certain non medical policies have a 2 year waiting period until the policy pays out.

    Regards … Lorne

  5. Ajish Prasad 02/10/2009 at 12:50 pm

    Hello,
    How much is the premium for a 34 year male and 33 year old female, non smokers for a term of 35 years for $ 350,000?
    Also let me know for a term 100 policy.
    I would like to know if the premiums fluctuate or reamin steady for both kind of policies.
    Thank You.

  6. LSM Insurance 02/10/2009 at 4:43 pm

    Hi Ajish,

    I will send you a seperate email with a quote. The rates on a 35 Year are fixed for the stated Term on a Term 100 the premiums are level for life.

    You can also get an instant quote at the link below. Regards … Lorne

    link to lsminsurance.ca

  7. Pandora 04/01/2009 at 10:36 pm

    Hi Lorne,

    I am 54 years old and my husband is 62. We want to buy a $100,000 life insurance and have received 2 quotes, they both are universal life.

    One quote is from Industrial Alliance, it is for a single based on my age. The premium amount is $2676 annually for 10 years and don’t have to pay after that. The death benefit is $100,000.

    Another quote is from Empire Life, it is for a joint life. We have to pay $1056 annually until we both passed away, then our beneficiary will get the $100,000 death amount plus all the premium amount.

    I can’t decided which one to buy, and also not sure which one will provide a higher IRR. Can you give me some advice?

    Thank you.

  8. LSM Insurance 04/02/2009 at 8:56 am

    Hi Pandora,

    Thanks for the note.

    I have attached quotes based on a female age nearest 54 NS and male age nearest 62 NS

    $100,000 – Last to Die -Life Pay – Empire Life $819.00 a year

    $100,000 – Last to Die – 20 Pay – Manulife $1384.00 a year

    Another variable the Universal Life plans quoted are likely dependent on interest rates – the above plans are guaranteed. The Internal Rate of Return is easy to determine but you need to make an assumption how long it will until the second spouse passes away.

    e.g. Under the Empire life plan if you live 20 years the IRR is 15.28% if you live years it is 7.99%

    I’m happy to help out further my contact details are below.

  9. Ian 04/21/2009 at 6:54 pm

    Hey, I have never seen a whole life policy with a return of over 3%. How can you promise a 5% rate of return… Also, 5% is not a great return for a long term investment.

  10. LSM Insurance 04/21/2009 at 7:14 pm

    Hi Ian,

    Thanks for the note. When looking at the IRR on a Permanent life insurance it will always be an estimate because there is no way of knowing when the insured will die. However it will almost always be greater than 3% and is usually around 7%.

    E.g. A 60 year old who purchases $250,000 Term 100 coverage. Annual Premium is $4989.12

    IRR at age 80 8.13%
    IRR at age 85 5.01%

    Regards … Lorne

  11. luke 05/07/2009 at 5:28 pm

    what if I have a series of uneven premium payments, for example, if my client has a term policy say with a fixed premium from age 62 to 75 of $6,230 and we estimate that his conversion premium at age 75 is $ 25,195 payable to age 90 for 1 million of coverage, can you calculate the IRR at 5 year increments?

  12. LSM Insurance 05/08/2009 at 6:24 am

    Hi Luke,

    This calculator can determine the rates of return on level premium plans. i.e Term 100, Universal Life with Level Term Cost insurance at the minimum premium or quick pay Whole Life plans.

    Best Regards … Lorne

  13. Ryan Stover 08/06/2009 at 7:09 pm

    Hey Lorne,

    I have a client that has an old Manu UL policy- with a YRT-
    He needs to convert to a Level COI-
    He’s 57- $300k of coverage- and the Level payment would be $7200/yr. what would the IRR be?

    Thx Ryan

  14. LSM Insurance 08/06/2009 at 8:00 pm

    Hi Ryan,

    Thanks for the note. The IRR assuming level payments for life is as follows. If the insured dies at 72 is 11.98% at 77 6.57% at 82 3.73%.

  15. julia 09/29/2009 at 8:34 pm

    My husband, 44 non-smoker,
    London life, 150,000 whole life
    monthly pay 113.78
    what is the IRR for live up to age 75,80
    thanks.

    my daughet’s two policies purchaswes when she was age 5, now she is age 15
    Clarica (Sun life)
    150,000,univesal life, premium 25(about)
    150,000, elite2000 preimum premium 30 (about)
    cash very is around 750 now

    aret hese two policies good for my daughter?
    or there are better solutions?
    I am thinking of change to 20 pay.

    Thanks

  16. LSM Insurance 09/30/2009 at 8:01 am

    You can see IRR below. Regarding you existing policies we would be happy to review your plans further. All the best!

    Coverage amount:

    Annual premium:

    Number of annual payments:

    Age
    IRR

    49
    128.94 %

    54
    42.09 %

    59
    22.60 %

    64
    14.45 %

    69
    10.10 %

    74
    7.44 %

    79
    5.67 %

    84
    4.43 %

    89
    3.52 %

    94
    2.82 %

    99
    2.27 %

    Hey Lorne,

    My husband, 44 non-smoker,

    London life, 150,000 whole life

    monthly pay 113.78

    what is the IRR for live up to age 75,80

    thanks.

    my daughet’s two policies purchaswes when she was age 5, now she is age 15

    Clarica (Sun life)

    150,000,univesal life, premium 25(about)

    150,000, elite2000 preimum premium 30 (about)

    cash very is around 750 now

    aret hese two policies good for my daughter?

    or there are better solutions?

    I am thinking of change to 20 pay.

    Thanks

  17. Benjamin 12/07/2009 at 11:58 pm

    This is not the IRR of a life insurance policy. It is the IRR of the death benefit.

    The IRR of the cash value is separate.

    Whole Life insurance is NOT an investment because it cannot go down in value. It is contractually guaranteed to increase ever year.

    Whole Life insuance is fixed income ASSET CLASS. The rates of return it will earn must be compared to that of other fixed income asset classes (bonds, CDs, treasuries, etc). You can’t expect one tool in an asset class to perform like a totally different tool in a totally different asset class.

    A CD or Money Market will not get the returns of a stock or mutual fund and neither will Whole Life.

    Over a 25 to 30 year period of time a Whole Life policy from a mutual insurance company (not a stock company) will produce anywhere between a NET 5.5% to 6.5% (tax free) rate of return. In order to get that return in a taxable vehicle you’d need to be getting around an 8.5% return to NET out at the 5.5% to 6.5%. This is historical FACT proven by any In Force Illustration from a MUTUAL insurance company such as Mass Mutual, Guardian, New York Life, or Northwestern Mutual.

    Term isn’t bad and most often a combination of term and whole life makes the most sense. Getting the correct death benefit is first and foremost. I don’t understand why some people think it’s an “either/or” scenario. I own lots of term and lots of whole life personally.

  18. LSM Insurance 12/08/2009 at 9:10 am

    Thanks for the note. I agree a combination of Whole Life and Term often makes sense it depends on the clients situation and needs.

    The above calculator is only intended to measure the IRR on the death benefit of a Life Insurance and as you pointed out life policies compare quite favourably with other risk free investments especially in todays low interest rate enviroment.

  19. Monty 05/23/2010 at 10:14 am

    I was think of taking 20 pay for myself & my wife. I am 40 and my wife 35, both not smokers and athletic.

    1) how much would be our monthly app. premium;
    2) how much app. return would we get on our investment say in 10/15/20 yrs, if we were to break policy and move to term.

    Thanks,
    Mike

  20. LSM Insurance 05/23/2010 at 3:58 pm

    Hi Mike,

    Thanks for the note. You can get an instant quote on our Whole Life quote page link to lsminsurance.ca.

    The cash value within each policy verifies between companies and plan types.

  21. Ami Maishlish 12/31/2010 at 9:16 am

    Congratulations for including the simplified IRR calculator in your website. This is one measure that is quite valuable to understand the financial value of life insurance in general.

    The Internal Rate of Return (IRR)is also quite a valuable tool for quantitative comparisons of life insurance, especially term life insurance, over any number of years and including renewal periods. Since quite a number of years ago, the functions to instantly compute and compare the IRR over any number of years and for multiple policies simultaneously was implemented in LifeGuide (Canada’s leading and most advanced life insurance quotation and comparison software), as well as in the advanced CompeteUS software for consumer minded agents in the US. The IRR functions are part of the Across-The-Board functions of the respective LifeGuide and CompeteUS systems.

    Oh yes, of course, the IRR is also an interesting and valuable tool for the yearly residual values (Cash Value, Fund Value, etc.) of permanent products (Whole Life, Universal Life, etc.). Naturally, this is also included in the IRR functions of LifeGuide and CompeteUS.

    Best regards and a happy new year to all!

    Ami

  22. LSM Insurance 12/31/2010 at 10:56 am

    Hi Ami,

    Thanks for your insights and kind words.

  23. jean 03/15/2011 at 11:33 am

    i am 72yrs old and would like an insurance(non- medical) to cover funeral expenses. please let me know.

  24. LSM Insurance 03/15/2011 at 12:08 pm

    Thanks Jean – we are happy to assist. The premiums will depend on your smoking staus, plan type and face amount.

  25. Rob 12/04/2011 at 11:50 am

    Great web site very informative

    looking for IRR for my situation

    Purchased 100,000 10 year term life for Female 54 years of age NS in 1994 for 50$/months transferred to permanent life in 2004, 100,000 for 200$/months
    what can i expect for IRR moving forward?

    Thanks

    Rob

  26. LSM Insurance 12/04/2011 at 2:04 pm

    Thanks for the kind words. The IRR will depend on how long the insured lives. If put in the 4 input variables into the above calculator you will get the IRR % at different points in time.

  27. Ami Maishlish 12/04/2011 at 5:39 pm

    Rob, I concur with Lorne in his response to you. In general terms, the IRR will decline the longer that the insured person lives. In your case, there are two periods involved: 1994-2003 at investments of $50 per month and then following from 2004 to the present or whatever post-present point that you want to examine to with investments of $200 per month.

    With the term, had the insured died exactly at the end of the 10th policy year and had the claim been paid immediately at that point, AND assuming that the premium was $50 monthly, the IRR would be 50.097%. Please note, however, that person overspent on that insurance merely for the reason that (s)he was likely paying approx. 18.6% financing charge to finance the premium monthly rather than to pay the whole annual premium in a single payment each year. Likewise, it is highly probably that the person is similarly overpaying on the permanent policy. I’d assume that the agent disclosed the APR of the financing cost when (s)he sold the policy with the monthly premium financing arrangement.

  28. don 01/05/2012 at 9:57 pm

    HI, I have a whole life c/l policy, i have 28872.00 in cash values as 0f dec/2010.my premium is 120.25 per month when do you think i have en ough cash to let the policy look after itsself.

    thanks don

  29. LSM Insurance 01/05/2012 at 10:29 pm

    Thanks Don – this calculator will not be able to generate this information. I would ask your broker/agent or the insurance company for an inforce illustration.

    The insurance company will have to assume an interest rate. This illustration should be free of charge. Regards,

  30. Ami Maishlish 01/06/2012 at 3:08 am

    Don, Before going to your question, I should note that paying for that policy monthly rather than yearly is not to your financial advantage. The reason for that is simple – you are likely dinging yourself with a high APR to finance the insurance premium on the monthly installment basis. Most likely monthly premium financing APR is above 18%, paid by you with after tax dollars, and that’s quite unattractive. The nice side of things, though, is that you can easily avoid the waste by contacting your agent or insurance company to change your premium payment mode to yearly.

    Relating to your question as to when your policy will “look after itself”, the quick answer is “never”.

    The reason is also simple: The death benefit of a whole life policy consists of the sum of the two components, “cash value” and “insured amount”. For example, if your policy states a death benefit of $100,000 and the “cash value” is $29,000, the insured amount is $71,000. If you start paying the insurance premiums out of the “cash value” through a “policy loan” you will start to consume the “cash value” by the principal “borrowed” PLUS the added financing charge (which normally hovers at approx. 8% per annum). Consequently the sum of the remaining “cash value” plus the yearly declining “insured amount” will result in a yearly accelerating reduction in the receivable death benefit under the policy contract.

    Notice: The above is a general overview response and is not meant to be, nor should be understood to be, advice that is specific to a specific case or specific policy contract.

  31. Your IRR calculator is good as far as it goes. Some shortcomings you might want to address:
    1. Allow for a starting cash value. This would allow the calculator to be used for policies already in force.
    2. Allow for varying death benefit amounts over time.
    Also, the resulting IRR’s presume that death occurs in the years specified, but doesn’t give you a sense of the likelihood of death in each year. I suggest that you read this article from the October 2013 issue of the Journal of Financial Planning:
    (Linked with permission by the Financial Planning Association, Journal of Financial Planning, October 2013, William Hezzelwood, Managing Life Insurance Policies)
    link to plannersearch.org

  32. LSM Insurance 10/21/2013 at 3:57 pm

    Thanks William. I appreciate the feedback.

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