Finding the rate of return on your whole life insurance policy

The annual cost is the first thing to consider when shopping for home or auto insurance. Life insurance, on the other hand, is unique in that it not only provides coverage but also has a cash value. As a result, the cost of maintaining a life insurance policy is frequently on the high side. Life insurance is classified into two types: term and permanent. Term life insurance, as the names suggest, has shorter, customizable durations, whereas permanent life insurance has a longer duration.

The amount of money your life insurance policy will pay out at the end of the term is calculated by calculating the policy's expected yearly growth, also known as the internal rate of return. However, determining the rate of return over a thirty-year or longer period of time can be confusing and inconsistent if you have a whole life insurance policy.

What is whole life insurance?

While term life insurance policies can last anywhere from five to twenty years, whole life insurance policies last until the insured's death. When you purchase a standard whole life insurance policy, the premium rate remains constant under all circumstances, and the beneficiary receives a lump sum payment upon the insured's death. Because the policy typically lasts decades and the insurer knows that a payout is unavoidable at some point, the premiums are higher than for other types of life insurance policies.

Whole life insurance is only useful for people who have families or dependents. Whole life insurance may be expensive and unnecessary if you are single or have financially stable family members who do not rely on your money.

How to calculate your whole life insurance’s rate of return

It is widely assumed that the cash value of your whole life insurance policy will increase year after year. However, this is almost never the case. You've come to the right place if you want to calculate the projected growth of your money in a whole life insurance policy. We've compiled a few pointers to help you figure it out without getting bogged down in insurance jargon.

Hire a professional

The IRR is determined by a number of factors, many of which the average consumer may be unaware of. A life insurance analyst or financial planner can analyze your policy's projected performance over time, compare it to other policies, and assist you in calculating an accurate estimated IRR. They can also investigate factors that influence the IRR, such as changes in mortality rates, and provide you with a realistic estimate of how much your money could grow in the near future, as well as recommend more profitable investment products.

Examine the insurance company’s dividend payout history

While most whole life providers will not reveal how your rate of return is calculated, they will provide examples of how your policy is expected to perform in the future.

These illustrations should include information about the policy's costs, how much you've paid, your current death benefit, and the cash surrender value you'd receive if you cancelled the policy today. It should also include projections for how your policy will perform in five, ten, and twenty years. However, these are frequently lengthy, esoteric, and overly optimistic. The company's dividend payout history is what you should be looking at. If a company's dividends have never been less than 5.5 or 5.25 percent in the last 100 years, it has a strong financial position.

Check IRR projections over the next decade

To understand your policy's rate of return, look at how the policy is expected to perform over the next few decades, including the average annual and year-by-year rate of return for 20 years or more. However, because this rate can vary greatly, predicting how much money you might make in the long run is impossible unless you hire a professional to do the math for you. A third-party insurance analyst is the best person to determine whether a whole life policy makes sense over time.

Is whole life insurance worth it?

Given everything we've said so far, you're probably wondering if whole life insurance is a good investment. The short answer is that for some people, it is worthwhile. Whole life insurance, in particular, can be a good option for high-income individuals who have exhausted their tax-deferred investment accounts, such as a 401k or Roth IRA. It can also help people who have long-term dependents, such as special-needs children.

Whole life insurance policies, on the other hand, are typically very expensive. It is not worth the high premiums unless you are getting a fantastic IRR. A term life insurance policy is a better option for the vast majority of people. The premiums are lower, and you can get comparable coverage.

It is critical to remember that just because whole life insurance includes an investment component does not imply that it is a good investment strategy. Because life insurance has additional expenses that other investments do not, the IRR on a whole life insurance policy is typically very low when compared to other investments.

Frequently asked questions

What is the best whole life insurance?

There is no single whole life insurance provider that provides the best policies for everyone. Each company has advantages and disadvantages, so the best one for you is determined by your personal needs and life circumstances. It is recommended that you conduct research on the major life insurance companies in your state or city, or hire a professional advisor to help you make the right decision.

Who needs whole life insurance?

Whole life insurance is not required by many people. It can be a good option for high-income individuals who have reached the maximum contribution limit for tax-deferred investments such as a 401k account. Because whole life insurance follows you throughout your life, it can be a good choice for people who have long-term dependents because their coverage never expires.