It is easy to calculate the returns from your mutual funds and stocks. Most fund houses mention annualised returns earned by investments in your portfolio. There are also portfolio trackers that tell you how your investments have performed. However, calculating the return from your insurance policy is not so easy. The insurance premiums are paid over several years and some policies even give out periodic payments. Therefore, a simple point-to-point or CAGR calculation cannot be used here. Also, unlike mutual funds and fixed deposits, there are no calculators for insurance policies, and the ones offered by insuretech portals are not very useful.
The formula for IRR = IRR (B2 : B12)The only option for a buyer is to do the calculation himself. The IRR (internal rate of return) calculation can tell you the returns that a policy offers. The concept of IRR is very complex and takes into account the inflow and outflow to arrive at the final figure. However, this complexity can be managed by using the inbuilt IRR function in MS Excel (see graphic). In the example considered here, the annual premium of Rs.25,000 is paid over 10 years and the maturity amount is Rs.3,50,000 in the 11th year. The IRR in this case is 6.04%. The outflow (premiums) are in negative, and inflow (payments and maturity amount) are in positive.
In case the payments are made at different times of the year, the XIRR function can be used. This takes into account the exact date of inflows and outflows, and accordingly calculates the returns.
So, the next time somebody wants to sell you an insurance policy, calculate the returns before signing on the dotted line. The 20-25 minutes you will spend on the calculation might save you 20-25 years of getting locked into a suboptimal investment.