Mastering Insurance Returns: Dissecting Numbers and Maximizing Value
Endowment plans and money back insurance plans are two popular insurance-cum-investment products in India. Evaluating these plans purely from a returns standpoint is not always the best approach. While returns are an important factor, there are several other aspects that need to be considered to make a well-rounded decision. It is crucial to understand how to analyze the numbers provided by insurance advisors. Here’s a detailed guide on how to dissect these numbers, calculate annualized returns, and factor in inflation, along with a holistic view of choosing such products. In this three-part blog series, let’s first understand how to calculate the returns on endowment insurance plans.
Endowment Plan Returns Calculation
Understanding Endowment Plans
An endowment plan is a life insurance policy that pays a lump sum on maturity or on death. It combines insurance and savings, providing both financial protection and a way to accumulate wealth over time.
Key Components of an Endowment Plan
- Premiums Paid: Regular payments made towards the policy.
- Sum Assured: The guaranteed amount payable on maturity or death.
- Bonus: Additional amounts declared by the insurance company, typically annually.
Calculating Endowment Plan Returns Using Excel or Google Sheets
Suppose you pay an annual premium of Rs. 25,000 for 20 years, the sum assured is Rs. 11,00,000, and the bonuses accrued are Rs. 1,00,000.
- Step 1: List the annual premium payments in cells A2 to A21 (each cell will have 25,000 in negative because these are the payments made by you).
- Step 2: In cell A22, enter the maturity amount (sum assured + bonus = 12,00,000).
- Step 3: Use the IRR function to calculate the annualised returns:
- Formula:
IRR(A2:A22)
- Formula:
Years Payments / Receipts Year 1 -25,000 Year 2 -25,000 Year 3 -25,000 Year 4 -25,000 Year 5 -25,000 Year 6 -25,000 Year 7 -25,000 Year 8 -25,000 Year 9 -25,000 Year 10 -25,000 Year 11 -25,000 Year 12 -25,000 Year 13 -25,000 Year 14 -25,000 Year 15 -25,000 Year 16 -25,000 Year 17 -25,000 Year 18 -25,000 Year 19 -25,000 Year 20 -25,000 Year 21 12,00,000 Annualised Returns (%) 7.76%
Calculating the returns on endowment insurance plans involves understanding the components of the plan and performing basic arithmetic operations to find the total returns. For a more precise measure of annualized returns, the Internal Rate of Return (IRR) method is used. Always consider consulting with a financial advisor to better understand the nuances and to tailor the calculations to your specific policy details.
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You are Good Financial Expert. Can you please help me make 10X of my money in 1 year. Cheers bro.
Good Information & easy to understand.
Waiting for Part-2