Everyone is unsure about the true return on investment of an endowment policy, and you too. If you have got a salary for the first time in your life, elders must have suggested you to have savings through endowment policy or insurance policy as you get good return on investment. This concept still prevails in the middle class people of India.
Do you know why buying insurance is recommended? Being a middle class person, this is best and one of the safest options to invest and return on investment is more than savings account and fixed deposits. Moreover, you get life cover like insurance benefits on your policy during the term period.
What is an Endowment Policy?
If you want to learn in simplest terms – life is covered with savings and more interest than savings accounts. It’s like a life coverage policy with returns.
I would say – “Life savings with life cover and returns”
You save every month every year and the insurance company keeps that money, invests and after the lock-in period (means, investment period), you get a maturity value (means, money after investing years).
When you got a job for the first time and as soon as you got your first salary, someone must have told you to get insurance now or take a policy to save money.
Every month or every year you save some amount from your salary and invest. It is usually for 20-25 years terms in which you get life cover of some amount and if nothing happens during the term period, you will get a sum assured by the insurer and with bonus. This sum insured and bonus varies among insurance companies in India.
This sum insured and bonus together makes “maturity value” and it’s difficult for any insurance company to guarantee you the bonus amount. However, the sum insured is mentioned in the policy documents.
In this post, I will discuss how much return on your investment you will get in terms of percentage which your insurer or insurance will never tell you and you might get into a wrong policy. Formula is simple and easy and you just need to know the basic use of Excel.
Let’s jump to the step by step process to implement the formula.
Formula for calculation of return on investment
For this, I would like to share with you an excel formula by which you can easily calculate the interest rate.
That formula is – “=XIRR(value,date)”
XIRR: This stands for “extended internal rate of return“. It’s an enhanced version of the IRR function in Excel. It means returns on investment depend upon the market performance or companies performance on which you have invested,
Value: This refers to the cash flows you’re analyzing. These could be investments or cash outflows/inflows.
Date: These are the dates corresponding to each cash flow. It tells Excel when each cash flow occurred.
So now let us know how to use this formula. Follow these steps –
- You have to open an excel sheet and
- write in one column how much money you should pay in a year for your policy, but remember that there must be a minus sign in front of your amount as you can see in the picture below.
- Now in the second column you can see that I have written the date on which I make payment for my policy. You can write your dates and you have to write the dates till which your policy will last. You can see in the picture how I have written.
The minus sign is because you are paying. And keep other years blank because you have some lock-in period too. Lastly, the return amount that you will get in return after keeping the money for a few years.
The returns may vary based on your policy. You can have a rough figure from your insurance agent or insurer so that you can calculate interest on your investments.
- Then you have to apply the XIRR formula like I have used above and refer to the picture shared below.
- After applying “=XIRR”, you have to give brackets() and then value i.e. completely select the column where you have entered the amount and then after putting a comma, you have to select the date column. And then as soon as you hit enter, you will see a number or result.
- When you multiply that number or result by 100, you will know how much interest (in percentage) you will get on the investment of your endowment policy.
If you still have difficulty, I am sharing with you an excel sheet (download here), you can download it (click here) and make changes as per your convenience. You can also learn difference between XIRR and IRR.
Calculate Returns before investing in Insurance or Policy
For more info on policies, term insurance, endowment policy, return on investment, savings, financial planning, follow my blog – finyojana.com.
