What is a LIRP? It’s a Life Insurance Retirement Plan.
A LIRP is commonly known as a life insurance retirement plan.
No, LIRP insurance is not a 401K, IRA, or Roth IRA, but some individuals can certainly benefit from this type of policy. Some have even dubbed the LIRP as a Super Roth IRA.
However, it is not a Roth IRA. It has many advantages without some of the limitations of your traditional retirement plans. The biggest benefit is when you start to take distributions from a well-funded policy, which we will explain later in this article.
An insurance retirement plan can be a powerful tool to use for retirement planning if it is funded properly and you choose the right carrier. These plans have become even more appealing as carriers have added multipliers and bonuses to the crediting methods over the last several years, as well as participation rates over 100%. Remember that there are many avenues to save for retirement – and all have pros and cons. With a LIRP, there are many more pros than cons.
So, let’s see what retirement life insurance plans are all about.
Is Life Insurance A Good Retirement Strategy?
While you may be socking money away each week into your employer-sponsored 401(k) plan – only to have the stock market make it disappear lately – you might be surprised to learn that these plans were really only meant to supplement pensions when they came out back in the 1970s.
In other words, the 401(k) plan that so many folks are counting on as their key source of future retirement savings – and in turn, the driver of their future retirement income – just might not be what you should be relying on to fund retirement, after all. And, there are a couple of good reasons for this.
First, a 401(k) is what’s known as a “defined contribution” plan. That means that you are only allowed to put in a certain amount of money every year. That essentially limits you, not only to how much you can contribute but also to how much growth you can get overall – because your base is limited.
Also, while it’s nice to have your income deferred into your retirement plan so that you don’t have to pay taxes on it now – guess what happens when you pull money out of your 401(k) plan at retirement time. You guessed it – you get taxed on it all.
Now, while I’m not telling you to walk away from your 401(k) plan, what I am asking is, what if there was a way to create your own retirement income plan – one where you have much more control over how, when, and where you can retire, and one where the income is truly tax-free?
How Do Life Insurance Retirement Plans Work?
Permanent life insurance policies – such as the Index Universal Life Insurance and Whole Life Insurance plan – are used to get the benefits of a LIRP. These life policies build up cash value as life insurance premiums are paid in – and this cash value may be taken out as a tax-free income stream.
The cash value of life insurance policies can gain interest in several ways. It can track an index like the S&P 500 in an IUL. However, your money won’t actually participate in the stock market, which gives you downside market protection – but you get all the upside index potential.
A properly funded LIRP provides tax-free income during retirement – and also leaves a death benefit for your heirs if you die. There is no better way to pass money from one generation to the next than with a permanent life insurance policy.
What Is The Biggest Benefit Of A LIRP?
Permanent life insurance policies (LIRPs) have many advantages compared to other retirement options. There are no annual income contribution limits, no 10% penalty if you get your money out before the age 59 1/2 as other traditional retirement savings vehicles do, and they eliminate market risk but still allow for upside market potential.
Here are a couple of benefits that come from buying life insurance retirement plans.
Tax-Free Income: The Biggest Benefit
Funding retirement with tax-free income vs taxable income is the most significant advantage of permanent life insurance policies. That’s just one of the many amazing features of life insurance retirement plans, though.
If you want tax-free loans, you’ll have to put a lot of time into your financial planner and get familiarized with estate tax issues.
For example, if you’re looking to generate tax-free distributions of $50,000, you’ll have to rely on tax-free withdrawals, i.e., the 4% per-withdrawal rule. Of course, your pre-tax contributions might be lower or higher than $50,000.
Another way to generate a tax-free income is to create a ROTH account – or, in other words, an individual retirement account or 401 (k). It won’t make your contributions tax-deductible, but after you turn 60, your retirement plan distributions will be entirely tax-free.
It’s important to note that 401 (k) plans have limited investment choices because they aim at keeping admin costs low and have what is called a fiduciary responsibility.
Eliminate Market Risk and Volatility
Saving for the future has become much more difficult lately. With its constant ups and downs, the stock market has left investors of all ages on edge and looking for alternative solutions.
Market volatility, coupled with longer life spans, the uncertainty of Social Security, and the constantly rising inflation, means investors need to supplement income sources – and a life insurance retirement plan can essentially provide an ideal solution.
An indexed universal life policy is permanent life insurance that combines cash value with its regular death benefit. That basically means that interest can be earned on your current savings, depending on the stock market index chosen by your insurer’s then-current criteria.
Backup Plans For Unemployment Issues
The thought of losing a job and losing your life insurance death benefit is frightening. However, things don’t have to play out that way. Preparing for such scenarios – and looking over personal finance – is crucial.
You can do so by securing a sizeable corpus that can provide substantial benefits for you – and your partner – in case someone loses their job.
In upcoming years, the cash value of universal life policies is bound to rise, too. Insurance carriers can help you fight the drawbacks of inflation with a LIRP.
The cash value account can track an index and with no caps, bonuses & multipliers, and over 100% participation rates you can easily outpace an index average and beat inflation.
Tax implications might be the primary benefit for retirement accounts – but investors should know that the very price of your life insurance loan can be deducted in the first place. That is done by choosing to invest in an insurance retirement plan (LIRP) while you’re still young. In case you weren’t aware, younger people pay premiums at a lower price rather than those who choose to invest later in life.
In terms of savings, a high net worth individual – someone who has over $1 million in savings, or more specifically, liquid financial assets – may benefit from having private financial advisors to help them navigate different life insurance policies.
Wealth Transfer to Next Generation
For one thing, life insurance plans don’t just offer death benefit protection. Rather, by taking advantage of the tax benefits that a permanent policy offers, a LIRP could essentially provide supplemental – and tax-free – retirement income, as well.
What Do Life Insurance Agents Do For You Exactly?
Life insurance agents are there to help their clients prepare for and cope with unexpected life situations and help them choose the perfect life insurance coverage for them. Given the topic we’re discussing today, they can also help you reap the benefits of LIRP explained above.
They are essentially there to dedicate themselves to financial planning and protect their clients – such as yourself – from financial loss in certain events.
Life Insurance Retirement Plan Example Case Study.
We will use a real illustration from an Index Universal Life Policy for the case study. You can also use a Whole Life Insurance Policy for retirement, but for this example, we will use an IUL.
A 38-year-old male could make contributions of $2,000 per month for 15 years for a total contribution of $360,000. Because he is paying into a life insurance policy, he immediately has a death benefit of over $423,694 which will protect his spouse and child should anything happen to him. And, as time goes on, his cash value continues to grow on a tax-deferred basis as well.
Now, here’s where the LIRP policy really becomes even more advantageous. At age 65, he starts taking income withdrawals of $95,496 per year. That income is completely tax-free.
The income will come out as a policy loan. The policy loan will be a tax-free loan to the policyholder as long as the policy never lapses. This means the policyholder must the policy in force until death and not allow the policy into a modified endowment contract. Either of these two scenarios can change the way the income is taxed on withdrawals.
There are numerous benefits to receiving this income tax-free. First, for obvious reasons, you won’t have to record it as income to the IRS! But there are other nice advantages, too. For example, you can create a steady and predictable stream of income at retirement.
In addition, unlike your 401(k), there is no minimum age requirement for withdrawals to begin. Therefore, if you want to wait to start taking your income, you have the flexibility to do so.
Likewise, there are also no mandatory RMD (Required Minimum Distribution) requirements. In other words, unlike the money that is inside a qualified retirement plan, you are not required to withdraw the funds at any particular age. This means that the money that is inside of the policy can remain in the cash value account for as long as you wish and can continue to grow and accumulate on a tax-deferred basis.
Is A LIRP A Good Investment?
A LIRP is the best life insurance policy and retirement plan you’ve never heard of (or that your financial advisor has never told you about). Other than a ROTH IRA, there’s arguably no better investment for retirement.
Even compared to a ROTH, LIRP has many advantages – and an argument can be made that this cash value life insurance is a better option.
We’ve already touched on some of the advantages of permanent life insurance policies above –but here are a few more bullet points.
Permanent Life Insurance Policies (LIRPs) Can Help
- Avoid Potential Tax Consequences – As permanent life insurance policies, LIRPs can help retirees avoid taxes on future withdrawals without jeopardizing their growth potential or liquidity. LIRPs allows for the tax-deferred build-up of cash value.
- Avoid Market Risks – LIRPs can provide an alternative investment strategy for retirees who’d like to mitigate market risks without sacrificing the growth potential or liquidity of their retirement accounts.
- Be More Financially Flexible – Besides offering certain tax advantages, LIRPs also provide portfolio diversification features that can allow retirees considerably more flexibility over their investments.
Who Is A Permanent Life Insurance Policy (LIRP) Good For?
A life insurance retirement plan is a suitable option for anyone healthy enough to medically qualify for permanent life insurance. Even though these are used for their tax-free retirement benefits, they still provide a death benefit, meaning you do go through underwriting based on your health.
- LIRPs are great for children and grandchildren. These crush 529 plans.
- LRIPs are great for early retirees by moving assets from taxable to non-taxable income.
- LIRPs are great for high-net-worth individuals who want to keep more of their hard-earned money.
Things To Consider When Buying A LIRP
When using a LIRP investment as a retirement income tool, there are some things that you’ll need to consider. First, you’ll want to give the plan several years – usually at least ten to fifteen – to grow.
Also, you have to be careful not to overfund a LIRP policy and have it become what is referred to as a “modified endowment contract” or a MEC. A MEC is a life insurance contract that is essentially changed when the cumulative premiums that have been paid into the plan during the first seven years of the policy are more than the amount that’s needed to provide a paid-up policy based on seven statutorily defined level annual premiums.
These plans are what the IRS deems as being too “cash value-rich” – and if it is established that a policy is a MEC, then it will no longer be allowed to have favorable income tax treatment.
Another thing to note here is that, even though some policies might not be tax-deductible, there might come situations where the beneficiary is taxed on some – or even all – proceeds. That generally happens when the beneficiary decides to hold the cash value policy after their death. Tax-free death benefit applies to accounts that are paid out immediately after death.
On a similar note, accelerated benefit riders pay interest while they’re alive.
It’s also important to keep in mind that not all cash value life insurance policies are the same – so it’s wise to work with an agent that can match you up with a policy that will best fit your specific needs and goals. We work with more than 40 different carriers, so we have access to a wide variety of plans and LIRP policies.
Try our LIRP calculator here.
A life insurance retirement plan is a tool used for tax-free retirement planning. Tax-free income, tax-free gains, and tax-free wealth transfer. In brief, this is a carefully chosen retirement plan that allows the cash value to help fund retirees.
Our life insurance agents are here to assist our clients to choose the best plan for them.
There are many benefits that come with a LIPR, but by far the biggest one is that you can generate a tax-free income by investing in a policy.
If you’re looking to insure your retirement investment a LIRP is a great option. Careful planning helps you avoid market risks, inflation and allows you financial flexibility.
Make a smart investment by contacting our agents for a personalized illustration today.