Are your insurance plans worth your time and money? Checking Internal Rate of Return (IRR) can help you find an answer to this question.
As simple as it may sound, analysts have been calculating IRR to find out the returns from two different cash flow sources and then compare them. This concept makes use of the formula that Net Present Value (NPV) does.
Inflation always causes the value of money to fall in the long run. It is because of the currency devaluation that the future value of money is always lower than its present value. The interim period and the effect of inflation on money have a damning effect on our purchasing power.
To find out how much you must invest today to arrive at a particular value in the future, you may evaluate the future value of money either online by putting in necessary values or using the following formula.
Present Value (PV) = FV / (1 + r) ^ n
FV = Future Value
r = Rate of Return
n = Number of Years
The idea behind calculating and comparing the IRR of various investment products is to check how the cash outflows fare in comparison to the cash inflows. IRR is a discounting rate making the NPV of all cash flows equal to zero in a discounted cash flow manner.
If you are not paying in a lump sum but in small instalments, then you must discount any future premiums to be paid at IRR to find out future value. Considering the complexities involved, investors now resort to the web to find out the future value of today’s cash outflows.
One can now compare different insurance plans with varying premium payouts and frequencies. The higher the IRR, the better the chances of the insurance plans earning you high returns and helping you meet your financial goals.