Insurance agents love to show you big numbers. "Look," they'll say, pointing to a ledger, "in 30 years, your policy will be worth $500,000!" It sounds impressive. It sounds like you're doubling your money. But is it actually a good investment?
Unless you run the math, you have no idea. A "double" over 30 years is less than a 2.5% annual return. That barely beats inflation.
To cut through the sales pitch, you need one specific tool: IRR (Internal Rate of Return). It’s the BS-detector of the financial world. Here’s how to use it to see what your policy is really worth.
🧮 Got your policy illustration? Don't just read it—analyze it. Plug your numbers into our free IRR Calculator while you read this. The results might surprise you.
The "Illustration" Trap
If you've ever bought permanent life insurance (Whole Life, IUL, VUL), you've seen an "illustration." It’s that 20-page packet full of dizzying charts and columns.
Here’s the dirty little secret: Those projected numbers often live in a fantasy land.
Illustrations usually show "Current" or "Non-Guaranteed" assumptions. They assume today’s dividend rates or interest caps will last forever. Spoiler alert: they probably won't. When interest rates drop, so does your cash value.
Even worse, agents often focus on the total cash accumulation rather than the rate of return. Why? Because the rate of return (IRR) on insurance is usually boringly low compared to the stock market.
How to Calculate Your Policy's IRR (Without a PhD)
You don't need to be an actuary to figure this out. You just need to look at your policy like a cash flow machine.
- Money Out (Negative): Every premium check you write.
- Money In (Positive): The Cash Surrender Value (if you quit) or the Death Benefit (if you die).
Let's Run the Numbers
Imagine you're 35. You buy a Whole Life policy.
- You pay $10,000 a year for 20 years.
- At year 30, the "Illustrated" Cash Value is $350,000.
- The "Guaranteed" Cash Value is only $280,000.
What's your return? Let's map it out.
| Year | Cash Flow | What's Happening? |
|---|---|---|
| 0 | -$10,000 | You write the first check. |
| 1-19 | -$10,000 / yr | You keep paying premiums. |
| 20-29 | $0 | Policy is "paid up." You wait. |
| 30 | +$350,000 | You cash out (Illustrated). |
If you plug this into our IRR Calculator, here’s the reality check:
- Illustrated IRR: ~4.1%
- Guaranteed IRR: ~3.2%
That 4.1% isn't terrible—it's better than a savings account. But it's miles behind the S&P 500's historical ~10% average. And remember, that 3.2% guarantee is the only thing you can actually count on.
Benchmarks: What’s a "Normal" Rate of Return?
So, is your policy a dud? Or is it standard for the industry? Use this cheat sheet to benchmark your policy.
| The Product | Real World IRR | The Verdict |
|---|---|---|
| Whole Life | 2% – 4% | Slow and steady. The "bond" of the insurance world. |
| Universal Life (GUL) | 3% – 5% | Cheaper than whole life, but less cash value buildup. |
| Indexed UL (IUL) | 4% – 6% (If you're lucky) |
Salespeople love to show 7%+. Real returns are often eaten by "caps" and fees. |
| Term Life | -100% (Usually) | You pay, you live, you get nothing back. And that’s okay (see below). |
"Buy Term and Invest the Difference" vs. Whole Life
This is the Godzilla vs. Kong of financial debates. Let's settle it with math.
Option A: The Saver. You buy Whole Life. You get a guaranteed death benefit and a 3-4% return on your cash.
Option B: The Investor. You buy cheap Term Life (say, $500/year instead of $10,000). You take the $9,500 you saved and dump it into an S&P 500 index fund.
The Winner? On pure numbers, Option B wins in a landslide.
Over 30 years, that index fund (assuming 7% growth) grows to roughly $900,000+. The Whole Life policy is sitting at $350,000. It’s not even close.
But... (and there's always a but)
Option B only works if you actually invest the difference. Be honest with yourself. Will you really auto-deposit that $9,500 every single year for 20 years? Or will you spend it on a new Tesla or a kitchen renovation?
Whole Life wins on forced discipline. It’s a bill you have to pay, which forces you to save.
What IRR Misses (The "Sleep at Night" Factor)
If we only cared about IRR, nobody would buy bonds, buy gold, or keep cash in a mattress. Life insurance offers things an Excel spreadsheet can't measure:
1. The "Hit by a Bus" Return
If you die one year after buying a policy, the IRR is something like 5,000%. That's infinite leverage. For your family, that check matters more than any percentage point.
2. Tax-Free Magic
Money inside a policy grows tax-deferred. You can borrow against it tax-free. When you die, the payout is income-tax-free. A 4% return that is tax-free might be equal to a 6% taxable return for a high earner.
3. Lawsuit Protection
In many states (like Florida or Texas), cash value in life insurance is 100% protected from creditors. If you're a surgeon or a business owner, that safety net is worth paying for.
3 Red Flags Your Agent Is Hiding
Before you sign, watch out for these tricks:
- The "No-IRR" Pitch: If you ask "What's the internal rate of return?" and they start talking about "cash accumulation potential" instead of giving you a number, run.
- The "Index" Bait-and-Switch: With IUL policies, they'll say you get "market upside." They imply you'll get the S&P 500's return. You won't. You get the index return minus dividends, capped at 10%, with fees deducted.
- Comparing Gross to Net: They'll compare their policy (which has no tax) to a taxable investment account, but use pre-tax numbers for the investment. It’s apples to oranges.
The Bottom Line
Life insurance is insurance first, investment second.
If you want high growth, buy stocks. If you want cheap protection, buy term. But if you want a safe, tax-advantaged bond replacement—and you have the discipline to commit for decades—permanent life insurance can fit in your portfolio.
Just don't buy it blindly. Take the illustration, strip out the marketing fluff, and calculate the IRR yourself. The math doesn't lie.
It's free, private, and takes 30 seconds.