Calculating rate of return on whole life policy

I tried searching through the threads and got a mish-mosh of no clear answer but perhaps I missed it.

How does one calculate the rate of return on a whole life policy?

Let's say for example I have a policy that I pay 6K per year into.
DB is approximately 350K.
CV at year 15 is say 100K.

What is the rate of return for this?

thanks all !

i don't think that is enough information since IRR (internal rate of return) is based on annual cash flow (net CV increase minus premium outlay). You can type in your illustration numbers onto an Excel spreadsheet and come up with a year by year net cash flow as calculated above. Then use the IRR function to come up with the final number. just to ballpark estimate i would say your IRR based on the final CV of $100k at 15 years is ~3-4%. I don't think the DB has anything to do with it.

Ah thanks. I thought about using the IRR function but didn't know what numbers to put into the formula.

Using the net cash flow makes a lot of sense but that would imply a negative number for quite some time, in my real case about 13 years.

Then I guess it would be the net cash flow vs the actual amount paid, right?

you only need one column of numbers to do the IRR function. however, that number is usually the result of a calculation of numbers on your illustration:
Column A__________ Column B________________________ Column C
Premium outlay >>>> Cash value increase (not total)>>>>> =Column B - Column A

you calculate the IRR as a function of Column C for the life of 15 years.

make sure you calculate Column B as the cash value INCREASE for that year (not the total CV). so if your CV went from $24000 to $32000 in year 9. Column B would read $8000 (the increase for that year).

Wow - I tried doing it but something must be wrong because it came out to 170%....

Here are my numbers for the first 5 years. Maybe someone can identify what I did wrong.

Ann Prem CVDelta (CVDelta-Prem)
257000 248453 -8547
6000 17397 11397
6000 24845 18845
6000 26443 20443
6000 28149 22149

The first year's premium is so high because of a transfer from another policy. When I insert the DIFF column into the IRR function in excel it's coming out to 165%....

I got 1.39% NET growth rate assuming $0 Present Value, $6K/year, 15 years, Future Value of 100K.

All of those variables that you guys are calculating, including the death benefit, don't really matter if you are trying to look at this from an investment perspective. If you are trying to look at what you are gaining after all of the insurance costs, mortality/expense charges, taxes, fees, etc... 1.38% should be a good representation of what you are gaining on your dollar when it is all said and done. Consider that over 15 years you only have $10 more than you put into the policy.

If you are using this as some sort of investment vehicle...STOP. You need to exchange it for Variable Universal Life, if that is the case and fund as high as you can before you get to the TAMRA limits. This is IF you already have maxed out your 401k/SEP/Roth/Traditional IRA contributions. If this is purely a life insurance policy you can live with the gains, but there are better options.

Using a VUL vs. Whole Life, like any other investment/savings is a measure of risk vs. return. A VUL MAY outperform a whole life, or it may not. A VUL indexed to the S&P 500 over the past 10 years would be in the territory of negative returns as you typed the prior post. A whole life will haved spanked it over the same period. Merely an observation. I believe my statement to be true when many VULs will be imploding over the next year or so. It's happened before...the crash of '87 and the tech bubble. In today's environment, I would think that many policyholders may be loving their whole life. Remember, a VUL illustration is purely hypothetical and today it does not match reality.

Absolutely agreee with Pricespector. Which is why I specified that if you are attempting to use life insurance as an investment vehicle, traditional whole life is not the way to go. With investment, risk and reward must be accounted for. As a life insurance policy, I still don't like traditional whole life, because the fixed accounts on VUL or ULs tend to have way higher returns.

VULs only blow up in your face if you both fund them improperly and the market tanks. Right now both things are happening because we can't do anything about the market nor can we do anything about financial advisors lying or overstating their products. This typically doesn't happen to people that have their investment suitability measured and addressed appropriately. I personally believe in their use and think highly of them, yet use them very sparingly, because very few individuals are fit to use them. However, it is incredible how many individuals have them that don't belong anywhere near one.

My biggest concern is that the BlastAway used this traditional whole life policy as an investment vehicle since he is sitting here trying to calculate the returns. If that is the case he is using the product improperly.

Kenneth Besada
Insurance/Financial Services
EMAIL: Kbesada@FarmersAgent.com

Actually the reason for calculating the return was to compare apples to apples between one policy and another.

The current policy that has been coming in at 2% compared to another one at 5% pretty much stinks.

Also, I don't quite understand where you get the idea of having only $10 more than what you put into a policy after 15 years??? The policy described, even for as bad as it returned had over 20K greater than what was put in.

I'm also not sure how you got that percentage based on the instructions indicated and using the IRR function in excel. IRR operates on a series of values across cells and if it's "Column C" the screwed up values comes up.
Perhaps it's the wrong Excel function. If you use IRATE rather than IRR I think it will work !!

Wow - I tried doing it but something must be wrong because it came out to 170%....

Here are my numbers for the first 5 years. Maybe someone can identify what I did wrong.

Ann Prem CVDelta (CVDelta-Prem)
257000 248453 -8547
6000 17397 11397
6000 24845 18845
6000 26443 20443
6000 28149 22149

The first year's premium is so high because of a transfer from another policy. When I insert the DIFF column into the IRR function in excel it's coming out to 165%....

technically, you are correct, the IRR for the 5-year period based on the numbers is 165%. BUT, the calculation is based on the faulty assumption that you really were able to put in $257k in one year when, in fact, it took you a certain number of years to attain that CV. i think if you broke it down and year-by-year, listed out your premium outlay and CV increase from the previous policy and then added those numbers starting from your first $6k of this new policy, then your IRR calculation will be more accurate (reflecting the amount of time it took to build the $257k).

Just a quick observation/question from an insurance "layman." In calculating a return on the cash value for any life insurance policy, shouldn't you make some assumption about the cost of insurance -- that is the death benefit minus the acutal cash value -- and then back that figure out of each annual premium? That's a little easier to do with a VUL since you get an annual report showing all deductions (although some would argue that the cost of insurance in these policies is inflated). With a traditional WL policy I would think you would have to make a best "guesstimate" each year based on getting a range of comparable term life quotes. Am I correct or off base here?