You are probably reading this because someone suggested that you look into a LIRP to help with retirement planning.
It was probably an insurance agent with a tax-free retirement pitch.
We feel that LIRPs or better known as a Life Insurance Retirement Plan can be a great supplement to your retirement income.
Historically, LIRPs have been a well known investment strategy to the wealthy consumer with excess cash to do something with. Over the last 20 years we have seen this change for the better.
With the creation of indexed universal life insurance by Transamerica back in 1997, more average income consumers are starting to step up to the plate.
After all, life insurance is needed by most of us to protect our families in the event tragedy strikes too soon. Why not use the tax advantages of life insurance to help create a tax-free retirement income that will last throughout your entire life and then pay a tax-free death benefit to your family when you die?
When it comes time to invest into your retirement, you’ll be presented with a wide-range of options, such as standard taxable investments like stocks and mutual funds, traditional IRAs, traditional 401(k)s, Roth IRAs, and Roth 401(k)s. Most of our clients have never even considered using life insurance to help plan for retirement.
A LIRP is much more flexible than an IRS regulated plan like an IRA or 401k. There is no limit on the income needed to start a LIRP. Generally speaking, LIRPs appeal to those individuals in higher tax brackets, but more and more consumers of average income are finding LIRPs useful for planning a prosperous and secure retirement.
LIRPs are long-term moves that require patience. If you are willing to commit to a systematic investing approach, a LIRP can be a great option. Since indexed universal life insurance or whole life insurance are the engines behind a LIRP, you have no risk of losing money when the stock market does take a crash. Slow and steady is the normal operating procedure of a life insurance retirement plan.
If you start out with a properly structured LIRP and fund it appropriately, many great benefits will begin to happen for you. First of all, you need to determine how much money you want to put in to your plan each year. This is how we decide how much life insurance to buy. Life insurance has an expense to it. We want to minimize these expenses. When we know how much you plan to fund, we can design a plan that will run as efficient as possible.
The sooner you start the easier planning for retirement using indexed universal life insurance will be.
It is a must that you choose a life insurance company that can perform in the long run. We can recommend North American, Midland National, Symetra, Allianz and Lincoln for most LIRPs. Choosing a company depends on our clients and their goals.
Key Features of the LIRP
- No Income Limit – Unlike the income restriction on a Roth IRA, a LIRP can be opened with any amount.
- No Annual Contribution Limit – While this varies from the rules followed by IRAs and 401(k)s, SIMPLE, SEP, and Keoghs plans, the contributions made to a LIRP are not tax-deductible. Additionally, just as with Roth accounts, your funds grow income tax free and you will be able to make withdrawals from your account income tax free.
- Flexible Spending Options – Options available typically include choosing between accounts that are indexed and actively managed or a guaranteed fixed return by the insurance company.
- Penalty Free – Different from most retirement accounts, LIRPs do not penalize you when you take income before you are age 59 ½. You may take a loan or a withdrawal from you life insurance retirement plan at any time you have a cash surrender value in your life insurance policy.
If LIRPs are so beneficial, why don’t we hear more about them? Some financial critics state that obvious benefits are negated by the high upfront fees. Another issue is that since it’s the bare minimum in insurance coverage, it’s difficult to do comparison shopping against other forms of life insurance coverage.
We have over 40 companies offering indexed UL and every company has different policies with different expense loads, index options and loan options.
LIRPs today will typically offer a built in guarantee against a loss of the principal, but they also cap the upside potential at around 12% – 13%. This is done through the use of options on the market. The most common index to use within the indexed universal life insurance policy sit the S&P 500.
Those who have at least 10 to 15 years to allow for the policy to grow and compound internally will see the most benefit. We do see some cases where someone wants to put in a large amount of cash in the first 5 years then start taking income. These short duration policies do not perform as well but can work in certain situations.
When should you use a LIRP
The sweet spot age group for a LIRP is age 20 – 55. The younger the better. Many say that over age 60 is a no go situation, we say lets take a look. We just had a case for a 63 and 66 year old couple that had large underperforming life insurance policies with close to $1,000,000 of cash value. We were able to do a 1035 tax-free exchange from those policies to a new indexed universal life insurance policy and improved their situation. The amount of income change at age 75 ended up being close to a $100,000 per year increase.
If you believe that you will be placed in a higher tax rate while in retirement, tax-free growth is the way to go. Financial experts implore their investors to wait until they have substantially built up their 401(k) before opening a LIRP. Contributions to a LIRP are not tax deductible.
For most, LIRPs are not a “do-it-yourself” policy, so you’ll definitely want to enlist the assistance of a qualified insurance agent. Purchasing a complicated whole life or universal life insurance policy with the intent to be used as a LIRP will require the help of a professional.
Many life insurance agents have heard of LIRPs and will be more than happy to provide one for you, this could be detrimental to your retirement. These are long term plans that will require annual reviews just like any retirement plan. Make sure that you work with someone that has a proven track record when it comes to LIRPs. You will need years of guidance, so make sure your advisor will be there with you 10 years or more down the road.