Wednesday, August 7, 2024
Insurance

# Life Insurance and IRR – Calculation and Overview

With so many life insurance policies available in the market today, it is essential to compare the payouts of each policy before subscribing. There are various objectives behind buying a specific insurance plan, like a pension or child plan. The premiums, amount, frequency, start date, and duration vary significantly. Thankfully, a life insurance IRR calculator can help you make an informed decision about which insurance policy to buy.

## Internal Rate of Return (IRR)

The Internal Rate of Return is an analytical concept that can be used to compare the returns from various cash flow streams. The concept of Present Net Value  (NPV) is used to determine the present value of cash flow or the future value of an investment.

The future value of any investment is always higher because of uncertainty in the interim period and expected inflationary trends. It essentially reduces the purchasing power of an individual, and the future value has to be discounted or reduced.

The formula for getting the future value of any investment is as follows:

FV = PV (1+r)^n, where r is the rate of return and n is the holding period.

To calculate the IRR of any investment, one has to consider positive and negative cash flow. The amount-paid premium represents a negative cash flow, whereas a payout represents a positive cash flow. After the cash flows are discounted, the Present Net Value is derived. Similarly, insurance plans can be evaluated through the internal rate of return.