Many insurance plans promise to double your money. Here's how to calculate the actual return.

livemint.com:

Life insurance policies that also promise guaranteed income entice people with claims such as: «Pay ₹1 lakh for 10 years and get ₹22 lakh lump sum after 20 years», or “pay ₹1 lakh for 12 years and start getting ₹2 lakh from the 14th year onwards for the following 12 years".

A potential buyer may think, “I pay ₹10 lakh but receive more than double that after the policy matures", or “paying ₹12 lakh a year for 12 years will mean I receive ₹2 lakh a year for the next 12 years."

However, this ‘doubling of investment’ is an illusion. People fail to factor in the time value of money – the concept that a certain sum of money has greater value now than it will in the future due to its earnings potential (and the effect of inflation). In other words, you can buy a lot more with ₹1 lakh today than in 10-15 years.

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This shows that returns from long-term life insurance policies should be calculated differently. Rather than the absolute return, you need to calculate the extended internal rate of return (XIRR). This is an advanced version of the internal rate of return (IRR) formula, which is used to calculate returns on a series of cash flows. IRR is used for cash flows that are of the same size and spaced out equally, while XIRR is used for cash flows that are of different sizes and occur at varying intervals.

Here’s the step-by-step process of calculating the XIRR on an insurance policy.

First, note down the following key numbers from the ‘benefit illustration table’ in the policy brochure: the base premium, premium with GST (add 4.5% in base premium in the first year and 2.25% from the second year onwards), premium paying term, policy term, age, sum assured, and