Main Menu Name: DB ROR
This part of the program calculates the effective rates of return that may be realized on a life insurance contract upon the death of the insured, based on the premiums that have been paid and the number of years that have elapsed since the policy was purchased.
In this article:
Although life insurance is usually purchased as protection against an untimely death, and not as an investment, the benefit that is payable upon the death of the insured can be analyzed like the return on an investment, and this analysis can be helpful in comparing different life insurance policies with different premiums and different death benefits.
The rate of return on the death benefit can be calculated by treating the premiums that are paid as though they were investments in a contract, and treating the death benefit as though it were the return on an investment at maturity.
The most important factor in calculating the rate of return will be the date of death. If death occurs shortly after the policy is purchased and before many premiums are paid, the death benefit will be extremely large compared to the total premiums paid and the rate of return will be extremely large. But if death occurs only after many years, a large number of premiums will have been paid and a significant amount of time will have passed within which those premiums could have been invested to produce the funds needed to pay the death benefit, and so the rate of return will be much smaller.
Of course, the date of death will not be known when the policy is purchased, and so a calculation of rates of returns on the death benefit should show a range of different numbers of years that might elapse before death occurs.
This calculation is most meaningful for whole life, universal life, and other forms of "permanent" insurance, and is less useful for term insurance.
The program calculates the rate of return on the policy death benefit by treating the premiums that are paid as though they were investments in a contract, and treating the death benefit as though it were the return on an investment at maturity.
The program shows a number of different possible rates of return, based on a wide range of different numbers of years that might elapse before death occurs.
The calculations assume that premiums will be level, and that the policy will become fully paid after a certain number of years of premium payments.
- Face Amount of Policy: Enter the amount of the benefit that will be payable at the death of the insured.
- Annual Premiums: Enter the annual amount of premiums payable.
- Years Until Fully Paid: Enter the number of years of premiums that must be paid before the policy is fully paid.
The program will calculate the different rates of returns that would result from deaths in different years, showing five-year intervals, from five to fifty years.