Posted by When starting to buy whole life insurance products, how do we evaluate the average rate of return over the years for every sum of money we invest in the policy, and what is the average annual cost?At the same time, how do we measure, in 10, 20, or even 30 years, which policy has more potential for its annual average rate of return?In the next article,American Life InsuranceThe editor of Guide.com will introduce in detail how to use the IRR indicator to measure the rate of return of the premiums paid to the current cash value.
What is IRR?
IRR, Internal Rate of Return, refers toInternal Rate of Return.
Just as we use a ruler to measure the length of things in our daily lives, IRR is usually a ruler used by investors to compare which project is more profitable.
IRR defines a compound rate of return that results in a net present value equal to zero.Please don't worry about these slurred technical terms, we will not introduce this set of complicated calculation methods and mathematical formulas.The American Life Insurance Guide only emphasizes the importance of IRR here and states to readers that it is a reference indicator for evaluating the design of life insurance policies and can be used to compare life insurance products with other assets.
Two rulers for measuring insurance policies:CV IRR and DB IRR
When comparing the performance of life insurance policies, there are usually two IRR indicators: CV IRR and DB IRR.
- CV IRR, Cash Value IRR, refers to the internal rate of return of the cash value of the policy.It is a compound internal rate of return calculated based on the Cash Surrender Value (Cash Surrender Value) that the user can withdraw when surrendering the insurance, combined with the time value.At an earlier point in the insurance policy, the CV IRR is usually a negative number, and when it reaches a year, it turns to a positive value. CV IRR is very useful for evaluating and comparing the long-term earnings performance of insurance policies.
- DB IRR, Death Benefit IRR, is the rate of return of the policy by comparing the accumulated cash value of the policy with the expected death insurance premium in the future years.This indicator is very useful in evaluating the performance of death benefits of different insurance policies.
For customers who are concerned about the rate of return on the cash value of an insurance policy, CV IRR is the focus of this article.
How can I find the IRR of my policy?
Before the formal application for a life insurance policy, the insurance broker will first design a copy for the policyholderPolicy design plan(Illustration), IRR is usually displayed directly inside.
Please note that even if it is the same product, different premium payment plans, payment period and the choice of insurance policy requirements, the plan will cause completely different IRR effects.
Next, we will show several different types and lifetime life insurance policies of different companies to illustrate the concept of IRR.
IRR description of a Whole Life design plan
The picture above is from an insurance companySavings and Dividend Life Insurance(whole life)ofPolicy design plan, We can see from the figure above, the 10-Pay customers use, the annual premium of $6000, pay off in 10 years.The red box is the display of the IRR of the cash value of this policy. From the figure above, we can see that after 11 years of insurance, the IRR of the cash value of the premiums of this product has changed from negative to positive, in the 21st year At that time, the IRR was 3.95%.
IRR description of a company's IUL index insurance design plan
The picture above is from an insurance companyIndex insuranceInsurance policyIUL)ofPolicy design plan, We can see from the figure above that the customer’s premium is $4098 per year, and the plan continues to be paid for 20 years.The red box part is the cash value IRR internal rate of return display of this policy. In this policy design, after 20 years of insuring, the cash value IRR rate of return on the premiums of this product shows 0%.
As shown in the figure above, when the policy enters the 52nd year, the IRR of this design is 4.20%.
What should I do if the policy design plan does not show on the IRR?
IRR is not the same mandatory indicator, so not all insurance companies need to show it.For some customized insurance policies, IRR is not directly displayed on the policy design plan. You can ask the broker or insurance company that provides the design plan.We take an example of the design plan of an IUL index universal insurance company that does not display IRR to show the calculated IRR rate of return.
IUL index insurance scheme calculates IRR
In the design plan of the IUL index insurance policy above, the plan is designed for customers with an annual payment of $14539 and a 10-year payment period.In this design plan, IRR is not displayed. According to calculations edited by the American Life Insurance Guide website, the following is the IRR rate of return for this design plan:
This table is divided into 3 columns:
- For the policy year, we have selected a length of 27 years;
- Cash value, showing the cash value in the policy for the year;
- IRR, which shows the internal rate of return corresponding to the policy in the year;
The chart shows that in the 8th year of the design scheme of this policy, the internal rate of return began to turn negative again. In 20 years, the IRR rate of return of the policy was 5.24%.If the Projected Interest Rate of this policy design is 6.0%, then we can calculate that the average cost of this policy is 0.76%.
Summary and conclusion
Simply comparing the three example insurance policy designs used to demonstrate IRR today, we can see that the following conclusions can be drawn.
- The IRR of the first policy design plan changed from negative to positive at 1 years, and the average internal rate of return of the policy after 11 years of insuring was 20%;
- The IRR of the second policy design plan only turns from negative to positive after 2 years, and the average internal rate of return of the policy is 20% after 20 years of insuring;
- The IRR of the third policy design scheme changed from negative to positive in the 3th year, and the average internal rate of return of the policy after 8 years of insuring was 20%;
I believe that after knowing this, you, as a reader, should know which of the above-mentioned insurance policy designs has the lowest return and the highest risk.
The IRR indicator is often a secret weapon used by many professional life insurance brokers to evaluate insurance policies.Reasonable analysis and measurement from the perspective of IRR rate of return can judge the financial health and sustainability of an insurance policy design plan.By adopting a more active and effective insurance plan, it can effectively avoid policy risks that may occur after 10 years of insurance, or even 20 years later.ininsurance brokerWith the help of, a reasonably designed insurance policy can achieve a better balance of risks and returns to meet the specific needs of policyholders.
The American Life Insurance Guide Network aims to remind the public, professional insurance personnel, of the important role they play in helping families, businesses and individuals find the most suitable insurance products for their needs.
If you want to know the IRR of your policy design plan, you can get free services in the following two ways :
Method 1: Scan the QR code and ask the licensed community contributor WeChat
Method 2: Ask a question to the mailbox of the American Life Insurance Guide website
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