What Is Internal Rate of Return (IRR) — and Why It Matters in Whole Life Insurance
A clear explanation of how IRR works, how it differs from annual rate of return, and why long-term context matters.
When people talk about “rate of return,” they’re usually thinking in short-term terms.
Was my money up this year?
Down last year?
Did it perform the way I expected?
That way of thinking is understandable. It’s how most of us have been conditioned to evaluate financial outcomes.
But when it comes to whole life insurance—especially policies designed for high cash value—there’s another metric that tells a more complete and honest story over time: internal rate of return, or IRR.
While IRR may sound technical at first, it’s actually one of the clearest ways to understand what your money has done across the entire life of a policy—not just in a single year.
How Most People Think About Growth (Annual Rate of Return)
Before getting into IRR, it helps to clarify the metric most people already recognize and intuitively understand.
Many whole life illustrations show something often referred to as a net growth percentage (which is effectively how most people think about annual rate of return, or ROR). This number answers a very specific question:
How much more money do I have this year compared to last year, after accounting for the premium I paid?
In other words, it focuses on year-over-year performance, not long-term averages.
How Net Growth Percentage Is Calculated
The calculation itself is straightforward:
(Cash Value Increase − Premium Paid) ÷ Prior Year’s Cash Value
For example, let’s look at a hypothetical year ten in a policy:
Cash value increased by approximately $155,000
Premium paid that year was $100,000
Net gain: $55,103
Prior year’s cash value: $1,047,582
When you divide $55,103 by $1,047,582, you get a net growth percentage of 5.26%—which matches what the policy ledger shows.
This calculation is approachable. Anyone with the numbers and a basic calculator can run it.
And it’s useful. It tells you what happened this year.
But it doesn’t tell you the whole story.
What Internal Rate of Return Actually Measures
Internal rate of return asks a different—and broader—question:
If I contributed money over time, what steady annual return would I have needed to earn every year to end up with this cash value?
Instead of focusing on a single year, IRR looks at performance across the entire journey—from the first dollar contributed forward.
Because of that, IRR naturally reflects the early years of a policy, when costs are higher and cash value is just getting started. It doesn’t ignore those years. It includes them.
Why IRR Often Looks Lower Than Annual Growth
Using the same policy example, the net growth percentage in year ten might be 5.26%, while the IRR at that same point might be closer to 3.33%.
That difference isn’t a flaw. It’s the point.
IRR is lower because it accounts for every year leading up to that moment—not just the most recent one. It smooths the entire experience into a single, honest average.
In that sense, IRR isn’t trying to impress. It’s trying to be accurate.
How IRR Is Calculated (And Why It’s Verifiable)
IRR isn’t a proprietary insurance estimate or a marketing projection. It’s simply math.
If you input:
$100,000 per year contributed for 15 years
An ending cash value of roughly $2.14 million
and solve for the interest rate required to produce that outcome, you arrive at an IRR of approximately 4.31%—the same number shown in the policy ledger.
That matters because it means the result can be independently verified. There’s nothing hidden or subjective about it.
Net Growth Percentage vs. IRR: Different Tools, Different Purposes
These two metrics are often compared, but they aren’t competing with one another. They serve different roles.
Net growth percentage shows what’s happening this year.
IRR shows what has happened since the beginning.
A helpful way to think about it is like running a marathon.
Your pace in mile twenty tells you how fast you’re moving right now.
Your average pace tells you how the entire race has gone.
Both are useful—but only together do they give you the full picture.
Why IRR Matters — and Why It Isn’t Everything
Internal rate of return is a valuable tool. It’s honest. It’s measurable. And it provides long-term perspective.
But it isn’t a scoreboard.
A policy with a higher IRR isn’t automatically “better” than one with a lower IRR. People have different ages, health profiles, contribution timelines, and priorities.
Some value early liquidity.
Others prioritize long-term legacy.
Some care more about access and control than maximizing returns.
IRR helps evaluate efficiency, but it doesn’t define purpose.
Whole life insurance isn’t about outperforming markets or chasing numbers. It’s about building something stable, intentional, and aligned with how you want to use money over time.
A Grounded Perspective
When used correctly, IRR is one of the most transparent ways to understand long-term outcomes inside a whole life policy. It keeps expectations realistic and removes unnecessary confusion.
But like any metric, it only tells part of the story.
Structure, timing, goals, and use matter just as much.
A Simple Next Step
If you’re trying to understand how IRR would apply to your own situation—or how different policy structures affect long-term outcomes—it can be helpful to walk through real numbers at your own pace, without pressure.
Clarity comes from context, not comparisons.
