Internal Rate of Return calculator for Life Insurance

“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 such as whole life insurance and universal life insurance offer guaranteed 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:
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William Hezzelwood, FSA, MAAA
William Hezzelwood, FSA, MAAA

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… Read more »

Ami Maishlish
Ami Maishlish

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… Read more »

don
don

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

Ami Maishlish
Ami Maishlish

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… Read more »

Rob
Rob

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

jean
jean

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

Ami Maishlish
Ami Maishlish

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… Read more »

Monty
Monty

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

Benjamin
Benjamin

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.… Read more »

julia
julia

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

Ryan Stover
Ryan Stover

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

luke
luke

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?

Ian
Ian

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.

Pandora
Pandora

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… Read more »

Ajish Prasad
Ajish Prasad

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.

Wilson
Wilson

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!

LSM Insurance
LSM Insurance

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

Regards … Lorne

tamara
tamara

What useful tool this is !!!