What is a LIRP?
LIRP stands for life insurance retirement plan. The most used life insurance product for a LIRP is indexed universal life (IUL) insurance. When structured properly, a LIRP can provide tax-free income during retirement much like a Roth IRA without the contribution limits of a Roth IRA.
This article provides clear details on how to structure your LIRP, what companies we recommend, some real life examples and how we can help you start your own LIRP.
I would like to emphasize that a LIRP must be structured properly in order to enjoy maximum cash accumulation growth and tax free income at retirement.
You might ask. “Why would I choose to contribute to a LIRP instead of my IRA or 401k? After all, I get a tax deduction when I contribute to my 401k.”
I’ve heard this many times before. The fact is, you will not receive a tax deduction when you contribute to a LIRP but you will be able to take tax free income from your LIRP. The income you take from your 401k or IRA is fully taxable and if you take any money out before you are 59 1/2 you get hit with a 10% early withdrawal penalty on top of the taxes you will pay.
Why is this important?
As Americans watch the national debt spiral further out of control, there’s a growing sense of dread. In fact, as of July 2023, our nation has gone from a budget surplus to being over $32 trillion in debt.
Seeing the enormous government spending, many Americans are turning to tax-free accumulation tools in order to protect their assets. Without them, the impact due to rising taxes, inflation in the economy, and investment risk in the stock market jeopardize the hope for a comfortable retirement.
For many future retirees, a well-designed tax-free retirement planning tool might include utilizing a LIRP. If your question is “What is a LIRP?,” stay with us as we go deeper.
In the past we have seen whole life insurance, variable universal life insurance and current assumption universal life insurance used as LIRP vehicles. Our recommendation is to use an indexed universal life insurance policy from a company with quality products. Properly structured it will minimize expenses and maximize cash value to create as much tax-free income as possible.
A LIRP is not a one-size-fits-all solution to retirement income.
Our planning process gives us a picture of what you are currently doing for your retirement including any holes in your plan.
It is very important to compare a LIRP to your current IRA of 401k in order to better understand how they work. Our LIRP planning software does that for you.
Since a LIRP is a life insurance policy there are expenses to consider.
We build your policy with as little life insurance as possible in order to keep your policy expenses to a minimum and maximize your retirement income.
Our calculators determine how much life insurance you need to purchase to satisfy the IRS and for your LIRP to be tax free. We build your plan around how much you want to save/contribute to your LIRP. When we know how much you want to save, we can solve for the minimum amount of life insurance to buy in order to keep your LIRP IRS compliant as well as income tax free.
We carefully reviewed the top IUL insurance companies and the following is our list of the top 5 we feel are worthy to use for life insurance retirement plans.
- North American (Builder Plus IUL 3)
- Allianz Life (Life Pro+ Advantage)
- Lincoln (WealthAccumulate 2 IUL 2)
- National Life (Summit Life)
- Ameritas (FLX Living Benefits IUL)
You can read our reviews for each of these here on our website.
Table of Contents
LIRP Advantages and Disadvantages [Pros and Cons]
A LIRP is a life insurance policy that incorporates many of the tax-free features of the traditional retirement accounts, like a Roth IRA.
Cash grows tax deferred inside your policy during the contribution years and income is taken income tax-free through policy loans. In addition to the distributions being completely tax-free, these distributions do not increase taxation of your Social Security.
LIRP Pros and Cons
| Pros | Cons |
|---|---|
| No funding limits like a Roth IRA | Long term plan, you keep the plan forever |
| No Loss of Value when stock market declines | Some LIRPs have an earnings cap |
| Access to your cash before age 59 1/2 | Surrender charge penalties in the earlier years |
| Creates a pension like tax-free retirement income | Unlike a 401k, your contributions are not tax deductible |
| Cash Value grows tax-deferred | |
| May access the death benefit for long term care needs | |
| Cash passes tax-free to beneficiary at death | |
No income thresholds to be concerned about
When it comes to a Roth IRA, there are strict contribution limits.
In 2023, for example, high income earners who are married and filing jointly, can’t contribute any of their income to a Roth IRA if their combined taxable income exceeds $218,000.
If you are eligible to contribute to a Roth IRA, you are limited to a contribution amount of $6,500 or if you are age 50 or older you can contribute $7,500. The deadline to make your Roth IRA contribution for 2023 is April 15, 2024.
You may also find yourself limited in what you want to contribute to a 401k or IRA.
The same limits apply to a traditional IRA as they do with a Roth. The maximum IRA contribution for 2023 is $6,500 or if you are 50 or older by the end of the year it is $7,500.
The LIRP has no such limitations and can offer the flexibility needed to increase or decrease contributions. You can even make up a contribution if you miss a year. You can’t do this with a Roth IRA.
Depending on the amount you would like to contribute to your retirement savings, a LIRP might be the answer.
No contribution limits like a 401k or IRA
The 401(k) limits for 2023 are $22,500 and SIMPLE deferral limit is $15,500 if you are under age 50. If you are over age 50 the these limits increase to $30,000 for the 401(k) and $20,500 for the SIMPLE.
Many of our LIRP clients max out IRA and 401(k) plans before contributing to their LIRP. We recommend this for high income earners receiving matching employer funds that are in the top tax brackets.
It just doesn’t make sense to defer taxes now if you will be in the same or higher tax bracket at retirement.
Little or no risk of government control
Large amounts of cash sitting in individuals’ life insurance policies have always been a target for the government.
The money in these accounts will continue to grow income tax-free, distribute tax-free income and at death, pass income tax-free to your family.
However, as has been noted on the side of history, the LIRP has been resistant to the impact of any such changes to tax law and remains an excellent way to use life insurance for retirement.
In fact, when Congress adjusted the rules on LIRP policies in the 1980s, those already in existence were continued to be taxed under the pre-existing laws (grandfathered clauses).
Just recently, congress passed a monumental revision to IRC Section 7702. The IRS is now allowing an even larger contribution to your LIRP than before. The change will help lower cost in your plan and increase cash value growth.
Index Options available
The LIRP offers the flexibility of choosing how exactly to allocate and grow funds within the tax-free cash value accumulation account.
The S&P 500 is the most common index used in these policies, however, policyholders can choose among many indexing strategies to choose from. You can also change from one indexing option to another and also have access to a fixed account earning a guaranteed amount of interest in your cash-value account.
Your risk strategy will change throughout the life of your LIRP so make sure that you choose a policy that is flexible.
Depending on the type of life insurance policy you choose, you will have the following options. As mentioned earlier, you can use whole life, variable universal life, current assumption universal life, and indexed universal life insurance.
- Stock Market (Variable Life) – Policyholders can deposit their contributions into mutual fund portfolios, known as sub-accounts by the insurance company they’ve chosen. Even though this method may provide more substantial returns, it does put the policyholder at risk if the market severely declines. Some consumers stay away from this approach due to the economic collapse experienced in 2008 and recently in 2022.
- Index (indexed UL) – The accumulated cash value associated with this strategy is tied to the upward performance of a specified stock market index, such as the S&P 500. Your LIRP participates in the growth of the index – currently around 9% – 11%. Conversely, if the stock market index performs negatively, the accumulation account is credited 0%. This is a safe, manageable way to grow your tax-free money for retirement.
- Insurance Company Investment Portfolio (whole life or current assumption UL) – Policyholders also have the opportunity to accumulate their cash value within the selected insurance company’s investment portfolio. Since insurance companies do largely manage risk, the return of these types of arrangements are usually safe, although modest. The average return of these types of policies ranges between 2 and 4%.
Indexed Universal Life Insurance compared to the Standard & Poor Index
This makes even more financial sense because the policyholder (investor) can realize market-like returns in the cash account without having to assume any risk in the market which lines up nicely with Warren Buffet’s famous rule of investing – never lose money.
With an IUL policy your bottom line is very clear; zero. Your floor rate makes your cash account immune to any losses that can occur in a volatile market thus prior earnings are protected. When you consider that since we’ve gone through 20 horrendous bear markets since the crash of 1929, the IUL provides the peace of mind that every investor yearns for.
Who’s to say if another is just around the corner? If so, IUL owners can ride it out without any losses.
Here’s a typical IUL Scenario
Harold is an ideal candidate for a LIRP using indexed universal life insurance. He is married, a successful attorney, and at 35 has his sights on retiring at 65.
Harold is prepared to fund his LIRP with $2,000 per month even though he has other traditional investments. His plan is to contribute $2,000 per month for 30 years and then begin to borrow against the cash value for a tax-free stream of income.
This is what Harold can expect in terms of tax-free income using an assumption of around 6% interest from age 66 until age 100:
Sample LIRP for a 35 year old male
| North American | Allianz | National Life | |
|---|---|---|---|
| Contribution Amount | $2000 per month | $2000 per month | $2000 per month |
| Starting Death Benefit | $1,000,000 | $1,000,000 | $1,000,000 |
| Death Benefit at age 65 | $3,240,000 | $2,915,000 | $2,785,000 |
| Cash Accumulation value at age 65 | $2,240,000 | $1,915,000 | $1,785,000 |
| Annual Tax-Free Income at age 65 | $259,000 | $166,860 | $158,000 |
| IRR at age 65 | 8.25% | 8.14% | 7.31% |
| Illustrated Rate based on historical returns | 6.24% | 6% | 5.73% |
Over 30 years, Harold’s total premium payments (contributions) of $720,000 have grown to over $2,000,000 and he can expect an annual tax-free income of over $200,000! And just as exciting, Harold’s death benefit for surviving loved ones would be around $3 million which is also paid tax-free to his beneficiaries.
It’s also important to make a comparison in the event that Harold decides to wait 10 years before pulling the trigger without increasing his monthly outlay in his LIRP.
Sample LIRP for a 45 year old male
| North American | Allianz | National Life | |
|---|---|---|---|
| Contribution Amount | $2000 per month | $2000 per month | $2000 per month |
| Starting Death Benefit | $600,000 | $600,000 | $600,000 |
| Death Benefit at age 65 | $1,534,000 | $1,422,000 | $1,416,000 |
| Cash Accumulation value at age 65 | $934,000 | $822,000 | $816,000 |
| Annual Tax-Free Income at age 65 | $107,000 | $72,000 | $68,000 |
| IRR at age 65 | 9.58% | 9.05% | 8.63% |
| Illustrated Rate based on historical returns | 6.24% | 6% | 5.73% |
Now, let’s change our hypothetical a bit and have Harold coming into the office at age 55 but still willing to invest $2,000 per month and still wanting to retire at 65
Sample LIRP for a 55 year old
| North American | Allianz | National Life | |
|---|---|---|---|
| Monthly Contribution | $2000 per month | $2000 per month | $2000 per month |
| Starting Death Benefit | $400,000 | $400,000 | $400,000 |
| Death Benefit at age 65 | $691,000 | $661,000 | $684,000 |
| Cash Accumulation value at age 65 | $291,000 | $261,000 | $284,000 |
| Annual Tax-Free Income at age 65 | $31,000 | $22,000 | $21,000 |
| IRR at age 65 | 14.36% | 15.25% | 15.29% |
| Illustrated Rate based on historical returns | 6.24% | 6% | 5.73% |
Even with only 10 years to invest before retiring, Harold’s $24,000 annual contribution grows to approximately $300,000 at age 65 and will provide a tax-free income of around $30,000 per year and a tax-free death benefit of almost $700,000.
Life insurance has expenses
A life insurance retirement plan (LIRP) sounds like a problem-free retirement tool, but it’s not a one-size-fits-all recommendation for tax-free growth. We will listen to your goals and compare different LIRP carriers to see which looks right for your situation.
In order to keep the definition of life insurance, you will need to have your policy structured properly.
You will need to maintain a minimal amount of life insurance and this amount is based on the amount of contribution you want to make. We strongly encourage that there is an actual need for life insurance before deciding on a LIRP. This is life insurance after all.
You may not see a huge need for additional life insurance but when you weigh all of the benefits, you can make your decision.
Most of the indexed universal life insurance policies that we see today offer an accelerated death benefit. This will allow you to access the death benefit without having to die.
The LIRP death benefit can be accelerated in the event of a terminal illness, critical illness or chronic illness. This makes for a great alternative to purchasing a long-term care policy.
If a policyholder doesn’t need to access the accelerated benefits available, then the tax-free death benefit will be distributed to your beneficiary at the time of your death. This is a lot cheaper than paying premiums for long-term care insurance that you might never use.
Keep in mind, however, that unless the LIRP is designed appropriately, the expenses associated with the policy can overpower the growth made within the accumulation account.
In order to fully maximize the advantages of the LIRP strategy, you will want to buy the minimum amount of insurance required while investing the maximum amount possible according to IRS guidelines.
LIRP Closing Thoughts
As we said earlier, when choosing life insurance to serve as a retirement income tool, there are a few key points that you’ll want to consider.
A LIRP is a long term play.
You will typically need at least 10 years for your accumulation period, but we have set some LIRPs up with shorter timeframes. The more time you have the better.
You will need to make sure the policy is structured to maximize the growth and minimize expenses. If you contribute too much your policy could become a modified endowment contract or MEC. MECs are life insurance policies with too little death benefit to support the premiums being paid.
We set your LIRP up so that it has no chance of becoming a MEC.
We will direct the carrier to send back funds to the policy owner in excess of the maximum allowed keeping them safe from becoming a MEC.
If a policy is found to be a MEC, the policy will not fall under the favorable income tax treatment of the LIRP because the IRS will deem it as too “cash value rich”. Remember, not all cash value life insurance policies are identical.
We can advise you throughout the LIRP process and review with you each year to make sure you keep on track with your goals.
You have to consider which carrier will work best for your situation. This will all depend on your personal funding level, health status and future retirement income needs and goals.
IUL can be a great retirement income planning vehicle for most age groups.
Many of our clients today are finding that their old traditional 401k or IRA accounts are a huge tax liability and are considering IRA to ROTH conversions. While this is not recommended for everyone, an IRA conversion may be ideal for our clients age 59 1/2 and older.
Being over 59 1/2 is the age where the 10% IRS penalty for early withdrawal goes away. By paying the tax on the converted funds now, an IRA holder can possibly eliminate hundreds of thousands of taxes over their lifetime.
Frequently Asked Questions
Why use a LIRP?
As a result of government spending, many Americans are turning to tax-free accumulation tools as a way to protect their assets for retirement from the impact due to rising taxes, inflation in the economy and investment risk in the stock market. A LIRP is a great tool for minimizing tax liability.
Are there Fees charged when you have a LIRP?
There are fees associated with any type of retirement plans. But since the LIRP is built using Indexed Universal Life Insurance, the fees have a lesser impact on your cash account than with traditional retirement products.
Are there contribution restrictions on a LIRP?
No, there are no limits on contributions.
Which type of life insurance should I use in my LIRP?
The best type of life insurance to use in your LIRP is typically Indexed Universal Life Insurance. This is because your policy’s cash account will be linked to indices and you will earn interest based on the performance of the indices. Additionally, if the indices you choose do not perform because of a down market, your account will not lose money.
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