In the ever-changing financial world, life insurance companies are recording dramatic growth. And one common question is lingering for many policyholders: How much investment returns will they receive from the policy? This is a crucial factor to consider before opting for a policy. It’s therefore important to know how to calculate the rate of return.
One common way to estimate the internal rate of return (IRR) is by using a life insurance IRR calculator. A financial calculator functions with the same stream of payments, whereas an IRR calculator enables estimation with varying cash flows. When you need to compute the rate of return with varying cash flows, it might not be possible with a traditional financial calculator.
What Is IRR?
IRR is the financial metric used to measure the performance of an investment. It operates through the following derived formula:
Formula:
NPV=t=0∑n(1+r)tCFt
Formula variable:
CFt=net after-tax cash in-outflows during a single period “t”
r=internal rate of return that can be earned in alternative investments
t=time period in which the cash flow is received
n=number of individual cash flows
IRR Calculators and Investment Return Rates
One may find it challenging to compute using the above IRR formula. But with an efficient calculator, it’s easily possible to evaluate the return rate of investments. It’s determined by multiplying the difference between the present or predicted future value and the original value by 100.
Calculating IRR in Excel
Excel makes almost all the calculations more accessible. It’s also applicable in calculating IRR. Below are two methods for estimating the return rate in excel:
- Use the pre-build IRR formula in the excel sheet.
There are three pre-build functions in excel for IRR calculation.
- IRR Function: The IRR function calculates how much time the IRR function in excel determines the internal rate of return for a sequence of cash flows with equal-sized payment intervals.
- XIRR function: The XIRR function produces a more accurate internal rate of return by taking varying lengths of time into account.
- MIRR function: The MIRR function (modified internal rate of return) considers the cost of debt of the initial investment funds and interest gained by reinvesting each cash flow. Other than that, it’s similar to the IRR function.
- Separately consider the cash flow components and estimate them in each step. Then use those outcomes as inputs through an IRR algorithm.
Bottom Line
The life insurance IRR calculator is helpful in various estimations such as deals on oil, gas, real estate, and policies (especially life insurance). IRR calculations can analyze capital budgeting projects to decide if an investment is worthwhile. The approximate profitability of the project can be easily calculated with IRR.
IRR calculators are helpful for both corporations and individuals. Corporations can evaluate stock buyback programs and individuals in evaluating various insurance policies using their death benefits and premiums or any financial decisions.
Another prominent application of IRR is assessing investment returns and computing the money-weighted rate of return on investments (MWRR). The MWRR aids in determining the rate of return required to begin with the initial investment amount, taking into account all changes in cash flows, including sales revenues, over the investment period.
