Money back life insurance policy typically yield an effective return
The principle of estimating net returns is to calculate the internal rate of return (IRR)
How does one calculate the net returns from a money-back insurance policy? I was shown two sample calculations but I am not sure if these are realistic. I want to calculate on my own.
The principle of estimating net returns is to calculate the internal rate of return (IRR). In this concept, you determine the implied interest rate in the product. You can do this using the IRR function in a spreadsheet like Excel. You will have to write out all the cash flows expected. These are given in the illustration and then apply the IRR function. Or you could ask your adviser to do this calculation for you. The IRR calculated can then be compared to the interest rate earned in other investment products. IRR in traditional money back policies is usually 3% to 5%.
What is the difference between special surrender value and guaranteed surrender value?
A guaranteed surrender value is defined by regulations and special surrender value is defined by the insurer differently for each plan. The special surrender value is more than the guaranteed surrender value.
Regulations require that all plans with premium-paying term of more than 10 years, should acquire a guaranteed surrender value after 3 years. Before 3 years, the plan need not have a surrender value by law. After 3 years, the insurance acquires a guaranteed surrender value which increases with time. This is expressed as a proportion of the total premiums paid and is generally less than 100% of premiums paid.
Special surrender value is defined individually for each policy. Typically, every policy will have a unique table with the surrender value that is defined based on the year in which the policy is surrendered.