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Factors that Determine the Returns of Insurance Policy
Traditional insurance policies do not provide monetary returns that one can normally see from a bank’s fixed deposit. However, the Premium that you pay at regular intervals provides you with Risk cover and some lucrative sops, say a lump sum amount as Maturity benefit, and so on.
Insurance for life or term insurance policies don’t provide even that maturity benefit. A ULIP might initially promise you a high return, but market swings can change your fortune and you may receive a low return on the investment plan you’ve made on the plan.
However, it is still possible to determine the rate of return of insurance plans. Some factors which influence Policy return are whether you or your beneficiary would get tax relief on the benefits or returns. If yes, then you make an edge over the others where income tax is levied on returns.
Risk Cover is also a factor which should be judged while analyzing a return. The return is primarily calculated on a yearly basis. An insurance policy with useful returns would provide a rate that hardly ever dips below 5 percent. The uneven cash flows and the number of years in the policy term period are some factors which determine the returns on a policy.
Calculators and Formulas to Calculate the Return
One method of calculating the return of insurance policy is to use a simple formula. You need to subtract the paid premiums with the total cash value of the policy and dividing the result with the total number of premiums paid on the policy. When you multiply the resultant with 100, you can get the rate of return. To know the yearly rate of return, you need to divide the rate of return with the policy term.
It is also possible to calculate the return on insurance policy by using the XIRR function of the excel sheet. The excel sheet has the option to calculate the return provided you place the required data. The data include cash outflow, paid premiums, cash inflow, and policy term period. The data used in the XIRR function provides the rate of return of the policy. Remember, the factors are provided in the policy update sheet.
So, if you are looking for a true calculator which can summarily calculate the rate of return of your insurance plan, say life insurance, term plan, endowment plan, or a ULIP, you can search for online calculators posted on the net or download an excel spreadsheet template to do the same. A correct calculation on the returns of policies would help you to manage your finances better and in a way that is analytically correct.