The Concept of Internal Rate of Return (IRR) in Whole Life Insurance

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The Concept of Internal Rate of Return (IRR) in Whole Life Insurance

When evaluating Whole Life insurance as a long-term financial asset, traditional investment metrics often fall short. Financial analysts use the **Internal Rate of Return (IRR)** to properly gauge the effective yield on the policy’s cash value, especially when compared against other investments.

What is IRR?

The IRR is the annualized effective compounded return rate that makes the net present value (NPV) of all cash flows (premiums paid out and cash value/death benefit received) from a policy equal to zero. It answers the question: “What rate of return did I earn on the money I paid into the policy?”

Calculating Two Types of IRR

  • Cash Value IRR: Measures the return based on the cash surrender value received if the policy is liquidated at a certain point. This typically starts low due to early fees but improves over time.
  • Death Benefit IRR: Measures the return based on the death benefit paid out. This IRR is usually much higher, as it includes the insurance leverage and the tax-free nature of the payout.

The IRR is crucial for comparing the policy’s tax-advantaged growth against taxable investment returns.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. Calculating IRR requires specialized software; consult a fee-only financial planner for an unbiased analysis.