Last Updated on December 29, 2021 at 4:53 pm
Here is how you can calculate returns from an insurance policy. The next time an insurance agent shows you a policy benefit illustration or the next time your friend or relative asks you, “Is this a good policy to invest in?”, use this method to show the annualized return they can expect (before bonuses which will not make a significant impact).
Let us take an example of PNB MetLife Guaranteed Savings Plan. This illustration was shared in FB group Asan Ideas for Wealth a few days ago. I love this example because it teaches always to compute XIRR and NOT IRR!! For those who an introduction to these terms, please consult: What is XIRR: A simple introduction
There are so many variations possible with these numbers to illustrate the time value of money. I have already done one example here: Why Time is Money and How Life Insurance Plans Exploit it! When I can, will make a video on the variations. For now, I will stick to the numbers as given by the insurer.
Shown below is an illustration for a 20Y policy with 10Y premium paying term. The sum assured ~ Rs. 5.56 Lakh and the annual premium is Rs. 50,000 or Rs. 59,000 with GST (notice that illustrations will not include taxes). These premia are shown as upward blue arrows below.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
At the end of 20Y, the policy will pay out Rs. 7,23,992 as a guaranteed benefit. It will pay out Rs 2,75,000 over the first 11 years of the policy in the following manner. After one year, the total premium paid is Rs. 50,000. So in the second policy year, 10% of this amount or Rs. 5000 will be paid.
In the third policy year, it will pay 10% of total premiums paid so far (Rs. 1 lakh) or Rs, 10,000 and so on. These are shown as the red down arrows that increase in size. The sum of all these payouts is Rs. 275,000. Now how to compute annualized returns?
First, we need to tabulate all the cash outflow and inflow as below.
- Col A is just the year no starting with zero (the 1st premium).
- Col B a set of imaginary premium paying dates. We shall assume the annual payout from the insurer is also on the same date
- Col C the premium paid (before GST)
- Col D the sum of total premiums paid each year.
- Col E actual premium paid (including GST). Shown as negative for return calculation. The money we pay is shown as negative and the money we receive is positive.
- Col F 10% of cumulative premiums paid is given to us (so this is positive).
- Col G is the total cash flow that is the sum of Col E and Col F. The final payout of Rs. 7,23,992 is shown as the final entry (20th year).
The XIRR or annualized return formula is as shown below. The XIRR formula is = XIRR(set of cash flow values, dates)
The annualized return is 5.11%
Note: IRR (a variant of XIRR for regular cashflows and therefore dates are not used) gives an inflated wrong answer. I have not dug deeper into this problem. This example shows that it is better to use dates + payouts and use XIRR at all times.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)