How to Calculate IRR for Annuities and Traditional Policies

Understand How to Calculate Returns on Annuity and Traditional Policies Using IRR to measure profitability accurately.
September 26, 2024
Understanding IRR for Annuity and Policy Returns
How to Calculate Returns on Annuities and Traditional Policies

How to Calculate Returns on Annuities and Traditional Policies

Many of you have written to us, asking how to calculate the return on traditional policies, endowments, and annuity products. The key concept to understand here is IRR (Internal Rate of Return).

Let’s take an example: Suppose you invest ₹2 lakh annually as a premium for 10 years. With GST, this amount increases slightly, and the premium continues for 10 years. After a 2-year waiting period, you begin receiving ₹4 lakh to ₹4.08 lakh annually from the 13th year to the 23rd year.

What you need to consider is: are you receiving this money at the beginning or the end of the year? To calculate the actual return, plot all these cash flows in Excel—what went out of your pocket as a negative, and what came back as a positive. Using the IRR formula, the return for this particular example comes out to 5.90%.

While it may seem like you are doubling your money (paying X and getting 2X), the actual return, after accounting for taxes and other factors, is 5.9%. This is how you calculate the returns of an annuity, traditional policy, or endowment policy using the IRR method.

Watch the video below for a detailed explanation of how to calculate your investment returns using IRR:

In summary, always consider what goes out and what comes back into your pocket, and use IRR to find out the real return on your investment.

Published At: Sep 26, 2024 10:27 am
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