Internal Rate of Return (IRR) Life Insurance Calculator
Estimated Internal Rate of Return:
Understanding IRR in Life Insurance
The Internal Rate of Return (IRR) is the most accurate way to measure the performance of a life insurance policy. Unlike a simple average return, IRR accounts for the timing and magnitude of your premium payments relative to the cash value growth or the eventual death benefit.
How This Calculator Works
This tool treats your annual premiums as periodic "investments" and the current cash value (or death benefit) as the final "return." It uses an iterative numerical method to solve for the discount rate that makes the net present value of all cash flows equal to zero. This specific calculation assumes premiums are paid at the beginning of each year (annuity due), which is the standard practice for most life insurance products like Whole Life or Universal Life.
Example Calculation
Imagine you have been paying $5,000 per year for 20 years. At the end of the 20th year, your policy has a cash surrender value of $150,000.
- Total Premiums Paid: $100,000
- Total Gain: $50,000
- Annualized IRR: Approximately 3.98%
While the total gain is 50%, the IRR shows you the equivalent annual interest rate you would have needed from a bank account to reach that same final value, accounting for the fact that you deposited the money over time rather than all at once.
Cash Value vs. Death Benefit IRR
You can use this calculator for two different scenarios:
- The "Live" Scenario: Enter your current cash surrender value to see the return on your savings component.
- The "Death" Scenario: Enter the total death benefit to see the return your beneficiaries would receive if the policy paid out today. The IRR on a death benefit is typically very high in the early years of a policy and gradually decreases as the insured person ages.