Definition
Internal Rate of Return (Insurance)
In insurance, the internal rate of return is the effective annualised yield of a savings or guaranteed plan after accounting for all premiums and payouts over time.
Many traditional and guaranteed plans market a large absolute 'guaranteed' payout, but the genuine return is the IRR, the discount rate that equates the present value of premiums with the present value of benefits. Computing the IRR often reveals modest single-digit yields for long-tenure bundled plans.
Because part of every premium funds life cover and charges, savings-linked life products typically deliver lower IRRs than separating term insurance from investments. Calculating the IRR is the single most useful step before buying any guaranteed-return or endowment plan in India.
Related terms
- Endowment PlanAn endowment plan is a life insurance policy that combines a death benefit with a lump-sum savings payout at maturity if the policyholder survives the term.
- Non-Par PolicyA non-participating (non-par) policy offers fixed, guaranteed benefits and does not share in the insurer's surplus or pay bonuses.
- Guaranteed Return PlanA guaranteed return plan is a non-par life insurance product that promises a fixed, pre-defined payout at maturity along with a life cover.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.