As we have mentioned before and will discuss again, a life insurance retirement plan or LIRP is a robust financial planning vehicle used by consumers of all walks of life to build their own private pension plan. With the uncertainty of social security and fewer and fewer employer sponsored retirement plans, a LIRP is a solid way to create your own retirement plan.
While there are too many insurance and financial products and services available to consumers today, a LIRP is a unique idea used by many high income earners to guarantee a retirement income that they will not outlive.
A LIRP isn’t for everyone but we will help you decide if you need to consider one. Let me go ahead and spoil it for you, our recommendation for a LIRP is indexed universal life insurance. Yes, a LIRP is life insurance. Let’s review the LIRP pros and cons.
The LIRP Pros and Cons
LIRP Positives
If you’re a risk-taker that enjoys the thrill associated with the investment highs and lows, then variable universal life insurance may be what you want to use for your LIRP. We will only be talking about indexed universal life insurance here. Indexed UL or IUL is a more conservative approach for a LIRP. It is our feeling that most consumers want the safety that IUL provides for a life insurance retirement plan. This certainly affects the life insurance retirement plan pros cons.
Safety in LIRP
Life insurance retirement plans provide what’s known as a guarantee, which is the floor of your investment returns. This guarantee means that your policy will never lose value because of a stock market decline. In fact, depending on your LIRP selection, you may even be provided the guarantee that you will never receive less than 2% to 3% over the life of your policy.
Certainly, this money-saving gadget should be considered in the LIRP pros and cons.
Additionally, a LIRP provides you with a guaranteed death benefit. When you die, and you will die, the death benefit will be paid to your beneficiary income tax free. The goal of the LIRP is to stuff as much money into the policy as you can during your working or accumulation years. We like to see a minimum of 10 years for this phase.
Income from LIRP
After the accumulation period, we will want to take a tax-free income from the life insurance policy. During the time that you are alive, your LIRP provides tax-free income that you can receive each year as a loan against your life insurance policy. This feature provides a great option to replace or supplement your retirement income on a tax-free basis. So imagine you are in a 25% income bracket when you retire. Other retirement plans such as a 401k or IRA will force you to pay the IRS 25% of all income you receive. When structured properly, income from a LIRP will be tax-free.
Remember, this is life insurance. After you have taken a lifetime of income your family or whomever you choose will receive the remaining death benefit tax-free which is another issue that belongs in the LIRP pros and cons.
A LIRP offers you tax-free growth, tax-free income and a tax-free death benefit.
Zero taxes paid on a LIRP
Most retirement investment vehicles are either tax-deferred, or fully taxed. However, the LIRP is completely tax-free. How is this possible? The funds invested into the LIRP is paid with after-tax dollars. When you borrow against your policy instead of withdrawing from it you will pay no taxes. Much like borrowing from the equity in your home, you pay no taxes to do so.
Critical and Chronic illness safety net
A LIRP also provides extra protection against the rising costs related to long-term care. The indexed universal life insurance plans we offer as LIRPs offer accelerated benefits. This feature allows for you to accelerate the death benefit without having to die. To be able to do this you will have to be diagnosed terminally ill or have a chronic or critical illness.
Everyone is different so proper LIRP design is unique to you
There are many life insurance companies that you can choose from. Here is a short list of some of the companies that we recommend:
- North American
- Allianz Life
- Lincoln
- Symetra
- Ameritas
We can provide a personalized illustration for you with any of them. Some of our clients choose whole life or current assumption universal life insurance. This is a personal choice and we can help with any of them.
LIRP Negatives
As with all life insurance products, LIRPS have downsides as well. The two main criticisms include that as a permanent life product, LIRPs tend to be costly, and the LIRP returns are poor. Let’s examine each criticism and drill down in the LIRP pros and cons.
Expenses in a LIRP
Sure life insurance has expenses. Just like all other financial instruments, expenses are part of a LIRP. Many financial counselors like Dave Ramsey will compare term life insurance with permanent life insurance. However, this is really not a fair comparison. With term life insurance, you are only paying for the actual cost of insurance, whereas with permanent life insurance, part of your premium is going towards your cash value. It’s only logical to conclude that the cost would be higher for a policy with savings component.
Furthermore, a term life insurance policy may be affordable now, but what about in 30 years when you are wanting to renew? You may find yourself wishing that you had locked in that permanent life insurance premium rate that would’ve given you coverage over your lifetime.
Poor Returns on LIRPS
Some argue that the rate of return is lower with an indexed UL policy than the actual stock market. We have found that over time, an IUL can compete with the market even with the expenses in the policy. A life insurance policy also has guarantees that prevent any losses due to stock market downturn. Even though the growth is slow and steady with a LIRP, you have easier access to your money tax-free a giant plus when you consider the LIRP pros and cons.
Don’t wait until it is too late to LIRP
Remember, we really want to see 10 years as an accumulation period. You will want to maximize your contribution and minimize your policy expenses. We know exactly how to design your LIRP so that it runs as efficient as possible. The younger you are when you buy your life insurance policy, the less it will take to reach your desired goal.
Frequently asked Questions
What are the pros of using life insurance in retirement planning?
There are many “positives” when you use life insurance to create wealth for retirement. What most people find in life insurance and not traditional retirement products is:
1. The IUL is not subject to market losses like other retirement products
2. You can create enough wealth over time for a tax-free retirement income
3. You have a guaranteed death benefit for surviving loved ones that is tax-free
4. Your policy has a safety net if you become critically ill or have to live in a nursing facility
Which companies do you recommend for a Life Insurance Retirement Plan?
There are many life insurance companies that you can choose from. Here is a short list of some of the companies that we recommend:
North American
Midland National
Allianz Life
American General
Symetra
What are some of the drawbacks with a life insurance retirement plan?
1. It’s life insurance so your rates are based on your medical underwriting results
2. There are some fees and expenses that will impact your policy’s value
Is a life insurance retirement plan a good strategy for everyone?
We recommend that people who are concerned that the traditional retirement products offered through their employer will not be sufficient to meet their retirement goals or expectations, strongly consider a life insurance retirement plan (LIRP).
