XIRR or CAGR

[ctan84]

Hi all, im quite new to financial calculations and was wondering when it comes to calculating the returns of whole life insurance plans and endownment plans, do we use XIRR or CAGR? Im asking coz my lao bu is about 5 years into a 15-yr endownment plan and she's curious currently how is it performing. For myself Im servicing a 20-yr old whole life and Im also wondering what's the current returns like?

I googled and was a tad confused. Websites like Dr Wealth states CARG can only be used for single premium endowment plans while XIRR should be used for regular premiums. But on the investment moat blog, cagr was calculated for regular premium plans. Can anyone shed some light?

 

[JuniorLion]

XIRR definitely.

 

[ctan84]

But am I able to do a quick simple calculation (for the endowment) by taking the current surrender value and deducting the total premiums, then divide by number of years already committed to get the simple annual % return?

 

[iamveryguailan]

But am I able to do a quick simple calculation (for the endowment) by taking the current surrender value and deducting the total premiums, then divide by number of years already committed to get the simple annual % return?

will be grossly inaccurate as you dont pay the premiums all at one shot, but over the xx years, which may be annual, semi annual, qtrly or even monthly payments

 

[TabascoSauce]

Hi all, im quite new to financial calculations and was wondering when it comes to calculating the returns of whole life insurance plans and endownment plans, do we use XIRR or CAGR? Im asking coz my lao bu is about 5 years into a 15-yr endownment plan and she's curious currently how is it performing. For myself Im servicing a 20-yr old whole life and Im also wondering what's the current returns like?

I googled and was a tad confused. Websites like Dr Wealth states CARG can only be used for single premium endowment plans while XIRR should be used for regular premiums. But on the investment moat blog, cagr was calculated for regular premium plans. Can anyone shed some light?

CAGR for one time lump sum investment or regular cashflow

XIRR for irregular cash flow

 

[ctan84]

will be grossly inaccurate as you dont pay the premiums all at one shot, but over the xx years, which may be annual, semi annual, qtrly or even monthly payments

In other words, based on current surrender value of the endowment plan, Im unable to tell if its current growth trajectory is as what's forecasted?

 

[ctan84]

CAGR for one time lump sum investment or regular cashflow

XIRR for irregular cash flow

Paiseh bro, am a bit lost here. If every month my mum is paying the same amount for the past 5 years for the plan, is that considered regular cashflow?

 

[TonyDelPiero]

Paiseh bro, am a bit lost here. If every month my mum is paying the same amount for the past 5 years for the plan, is that considered regular cashflow?

The most important thing for you is to understand the purpose of the formula of XIRR and CAGR.

If you look at CAGR, it does not take account the timing precisely. That is why they advise you to use it if you invest regularly (i.e. invest $100 every month without fail). That is why it is power of (1/no. of year).

If you look at XIRR, it does take account of the dates you invest at how much. (i.e 1 Jan $100, 1 May $100... it is so irregular and it does not imply regular cash flow at all).

 

[Mecisteus]

Dude, Google should be your best friend.

There are so many explanations out there in the web.

https://www.investopedia.com/ask/an...th-rate-cagr-and-internal-rate-return-irr.asp

 

[tangent314]

Paiseh bro, am a bit lost here. If every month my mum is paying the same amount for the past 5 years for the plan, is that considered regular cashflow?

Yes, but CAGR only really works for single premium. For regular cashflow you should be using a TVM calculator instead.

 

[TonyDelPiero]

Yes, but CAGR only really works for single premium. For regular cashflow you should be using a TVM calculator instead.

Hmm, you made a good point about CAGR.

 

[blurpandasg2014]

In excel u can use IRR to calculate
XIRR u must be very specific abt the date u invested the amt. But since payment for endowment is usually consistent like every mth or every Yr on the same date, IRR or CAGR shld be applied

 

[Mecisteus]

Don't listen to the keyboard warrior.

He is just parroting what has been discussed.

 

[smart_alex]

so endowment is XIRR or cagr?

 

[boiboi123]

Regular fixed cash flows use CAGR, otherwise XIRR is my preference

 

[dork32]

lets talk maths

cagr works this way

lets say you put in an initial investment of 100 and the returns is 10% compounded annually

after one year you have 100 * 1.1 = 110.
after 2 years you have 100 * 1.1 *1.1 = 121
after 10 years you have 100 * 1.1^10 = 259

you final value/ initial value (259/100) = 2.59. it means that your investment increase by 2.59 times over the 10 years. by taking 2.59 ^1/10 gives you the common ratio of 1.1. 1.1 is made up of 1 (principal) and returns 0.1

does that sounds ok?

 

[Mecisteus]

so endowment is XIRR or cagr?

Endownment has a single and recurring payments.

For a single payment, you can use a simple CAGR formula.

For recurring payments, you can use an annuity, IRR or XIRR formula.

Regular fixed cash flows use CAGR, otherwise XIRR is my preference

I think you meant an annuity formula. CAGR is the end result of using the annuity formula.

 

[blurpandasg2014]

Is IRR = CAGR?
Since both are periodic and fixed intervals

 

[dork32]

this is how xirr works for lets say you put in an investment of 100 every year for 10 years at 10%

the 100 put in during the first year will earn 10% interest 10 times = 100 x 1.1^10
the 100 put in the second year will earn 10% will earn the interest 9 times = 100 * 1.1^9
do that for all the 10 years.
if you took a maths at o level, you will realize this is an gp with a = 100
r = 1.1 and n = 10
Sn = a(r^n-1)/r-1 = 1593.
or you can use the fv formula in excel or financial calculators where
rate = 0.1, nper = 10, pmt = 100, pv = 0

to calculate xirr, an interative procedure is used to get r such that the Sn formula is satisfied. r is made of 1 (principal) and 0.1 (rate of return)

 

[dork32]

cagr does not work for regular fixed investment.

the reason is that the formula requires a initial investment.

so what do you want to key for this number for my example (100 per year for 10 years at 10%)
putting 100 is not fair because you put in much more than that
putting 1000 is not fair either because only the first 100 earns the full 10 years of return
using the arithmetic mean (100 +1000)/2 give you quite a good estimate of 11.1%
using the geometric mean (100 * 1000)^0.5 gives you 17.5%