Life Insurance As An Asset Class

We all need life insurance to take care of the economic loss to our families in case of our early demise.

In case we are taking on huge debts, it also makes good sense to purchase life insurance of a value high enough to cover them in case of your untimely demise.

However, beyond this, most people don’t bother to dwell on life insurance, because it’s acutely uncomfortable contemplating one’s own mortality and talking of the death of another. Its easy to just purchase a term cover and proceed with investing in say mutual funds.

However, if you can control yourself emotionally and go beyond  common financial dogmas that straightaway class all insurance products as bad and recommend a strict segregation of investment and insurance, you open your mind to the fascinating world of life insurance as an asset class and can start designing your own financial products that give you better returns, safety and control. Think. All insurance products are ultimately about inflows and outflows of money at various times. And only your own knowledge and imagination are limits on what you can build. Who says you can’t combine various insurance products? Or insurance and other financial products in any order? That way the blended rates of return, tax treatment, risk-reward ratio, lock-in periods and greater overall control and ability to make course-corrections are in your control to much greater extents.

To create unique and personalized financial products incorporating life insurance policies you need to figure out to how use excel to run IRR , MIRR , XIRR , XMIRR for various scenarios. You can either follow the instructions in the software itself or watch You Tube videos for instructions. Its pretty easy to do actually. Don’t let first appearances faze you.

At the heart of IRR , MIRR , XIRR , XMIRR is the NPV=Net Present Value. Net Present Value is the current value of a future series of payments and receipts and a way to measure the time value of money. Basically, money today is worth more than money tomorrow. And future money is discounted by the interest rate you specify.

The IRR=The Internal Rate of Return , is the interest rate that makes the NPV equal to zero for the series of cash flows.

When the cash flows are at irregular intervals,we use XIRR.

IRR assumes that positive cash flows are reinvested at the same rate of return as that of the investment.MIRR is a modification of the IRR calculation and is used when cash flows are reinvested at different rates of returns.

MIRR where dates are taken into account is called XMIRR.

Do spend the time plugging in values from different insurance products, other financial products and their combinations on a spreadsheet. You’ll soon find the whole exercise fascinating and 8+% tax-free returns over 30-50 years is superbly interesting, especially when you enjoy a great degree of predictability in returns and are facing very little risk.