Insurance Policy Rate of Return Calculator
Calculation Results
Total Premiums Paid:
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Net Profit (Maturity – Paid):
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Absolute Return (%):
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Internal Rate of Return (IRR):
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*The IRR represents the annual compound interest rate equivalent of your policy.
How to Calculate Rate of Return on Insurance Policy
Many individuals purchase insurance policies such as Endowment Plans, Money Back policies, or Unit Linked Insurance Plans (ULIPs) combining investment with protection. However, insurance documents often highlight the "Sum Assured" or "Bonus" without clearly stating the actual annual return on investment. Calculating the Internal Rate of Return (IRR) is the only accurate way to compare an insurance policy against other financial instruments like Fixed Deposits or Mutual Funds.
Understanding the Inputs
To determine if your insurance policy is a good investment, you need to understand the cash flow structure:
- Annual Premium: The amount you pay out of pocket every year. This is a negative cash flow.
- Premium Payment Term (PPT): The number of years you are required to pay the premium. Note that in some policies, the PPT is shorter than the full policy term.
- Total Policy Duration: The total life of the policy until maturity. The money stays invested until this year.
- Maturity Amount: The final lump sum you receive at the end of the policy duration, including the Sum Assured and any accrued bonuses.
Why Simple Interest Calculation Fails
A common mistake is calculating returns using simple math: (Maturity – Total Paid) / Total Paid. This gives you the "Absolute Return," but it ignores the Time Value of Money. Receiving 50,000 profit after 20 years is worth much less than receiving it after 5 years. Our calculator uses the IRR method, which accounts for the timing of every premium paid to give you an accurate annualized percentage.
Interpreting Your Results
Once you calculate the IRR:
- Below 4%: This is typically lower than inflation and savings bank rates. Such policies may result in a loss of purchasing power over time.
- 4% to 6%: Comparable to traditional Endowment plans. While safe, returns are often modest compared to other debt instruments.
- Above 7-8%: Usually seen in well-performing ULIPs (market-linked) over long durations, though these come with market risks.
Use this calculator before buying a new policy or to evaluate whether to surrender an existing underperforming policy.