What Is a LIRP?

If you’ve been paying attention to the latest stock market trends, you may have noticed that the markets have been especially tumultuous since COVID-19 began. For many people, this can have a major effect on their plans for retirement. The most common retirement plans you hear about are those that are tax-deferred: 401ks, IRAs, etc., However, there are retirement plans beyond the traditional options that may offer a more stable solution. One of those is called a LIRP, a.k.a. Life Insurance Retirement Plan.

How Do LIRPs Work for Retirement?

As you have hopefully read in our previous posts, there are several different types of Life Insurance: whole life, term life, universal life, accidental, etc. Some of these plans, such as universal life insurance, accumulate cash value over time, whereas others, like term life, do not. Any plan that builds cash value can technically be used as a LIRP, however the most common type of plan to use is a Universal Life Policy.

Universal life insurance can be used for retirement because of its flexible premium schedules and cash value growth. How much cash value a policy builds is based off the monthly or annual premium that is paid into the policy by the policy owner. Since you are funding your policy with after-tax dollars, this cash value is tax-free so you do not pay taxes on it as it grows.

Now, cash value growth can sometimes be minimal, but in order to turn your Universal Life policy into a LIRP, you must overfund your premiums. That means that instead of paying the minimum cost of insurance that is required to keep the policy active, you invest more money into it, just as you would do in any other retirement plan. For example, you can set aside $50, $100, or $150 out of each paycheck in additional premiums to increase your cash value and ultimately your retirement income.

One thing to consider is that not all Universal Life policies are created equal. The best type of Universal Life policy to use as a LIRP is called a “Fixed Indexed Universal Life” or FIUL. The “Fixed Indexed” portion means that your policy grows by gaining interest using the S&P 500 index, “Universal” means your premiums are flexible, and “Life” means there is a guaranteed death benefit that will be paid out tax-free to your beneficiaries.

What is the Difference Between LIRPs and Traditional Retirement Plans?

There are some major differences between traditional retirement plans (401ks, IRAs, etc.) and Life Insurance Retirement Plans that are valuable to understand.

LIRPs have no contribution limits.With traditional retirement plans the IRS controls how much you can contribute to the plan each year, and dictates if you are even allowed to contribute at all based off your income levels (ex: For IRAs the contribution limit is $6,000 annuallyor $7,000 if you’re age 50 or older). Life Insurance Retirement Plans on the other hand are not regulated by the IRS so you can contribute as much as you want above your minimum premium (the minimum is the amount required to keep the policy active).

This means you can build more cash value and save more for your retirement.LIRPs have a guaranteed element that protects you from a downturn in the market.The growth in cash value of a LIRP is based off the contributions invested by the policy owner and the performance of those investments in the S&P 500. While traditional retirement plans ALSO invest in the same markets, Life Insurance Retirement Plans are unique in that they provide a guaranteed minimum interest rate of a certain percentage specified in your policy. This means thateven in year of economic recession, you can never take a loss.Compare that to the 401ks and IRAs that have lost thousands of dollars in the wake of COVID-19 and you can understand the benefit.LIRPs have no penalties based on age for early withdrawalsor required distributions.Most traditional retirement plans charge a 10% early distribution tax if you attempt to withdraw money before age 59 1/2. This can be frustrating because at one time that money was yours, yet you are not allowed to access it.

LIRPs do not have any penalties based on age. Instead, you can access your cash value at any age via a loan or withdrawal. Some carriers may charge minimal administrative fees for withdrawals, but loans do not have fees. In addition, with 401ks and IRAs you have a required minimumd distribution that you must take annually after approximately age 70 (it differs for each retirement plan type), but LIRPs give you complete flexibility of when and how much money (if any) you wish to take.LIRPs have no legislative risk.Historical clauses by the government protect the LIRP and your contributions from being limited by changes in government policy. Meaning, the way LIRPs function today is likely how they will continue to function in the next 100 years or more. Conversely, tax-deferred retirement plans are regulated by the IRS and these regulations are often changed along with their limitations.LIRPs are privately owned by YOU, not by your job.One of the major drawbacks of traditional retirement plans that come as a “benefit” to a job, is that you usually can’t carry them with you if you get fired or quit. We probably all know someone who contributed for YEARS to a 401k only to get terminated from their job and lose everything they contributed. LIRPs on the other hand are almost never offered with a job (most jobs only offer term life insurance), and therefore privately owned by YOU.

This means you make all the decisions for your own policy and no one can take it away from you because of your age, career, or lifestyle changes. You also have complete control of the money you put in or take out, as well as who will receive your death benefit when you pass away.LIRPs provide long-term care needs.Since LIRPs are life insurance plans at their core, they often include some additionalliving benefits. One of these benefits is called an Accelerated Death Benefit, which allows you to access your policy’s death benefit if you qualify for certain medical conditions (cancer, heart attack, stroke, etc.). While none of us plan to get sick, the Accelerated Death Benefit can give you the security of knowing you will have available funds if you should be diagnosed with a serious illness or require nursing home care or in-home care. Without this benefit, medical expenses caused by life-threatening illnesses often leave families struggling to pay their medical bills.Unlike traditional Long-Term Care insurance plans, if you do not ever need to utilize your Accelerated Death Benefit, that money remains in your policy and will be paid out tax-free to your beneficiaries upon your death.

How Do I Know If I Need a LIRP?

Life Insurance Retirement Plans aren’t just for one specific demographic or group of people. Just like with any investment plan, the younger you start your plan, the more time you have to accumulate interest and increase your cash value. LIRPs are a great option for anyone who wants to save for retirement, while also having the security of a tax-free death benefit to leave to their spouse, children, or other family members.

LIRPs are especially beneficial for high-income earners who max-out on their contribution limits of their other retirement plans. Federal tax rates on retirement income are continuing to increase, so while it may seem like a “win” to put hundreds of thousands of dollars away into tax-deferred retirement accounts, you are actually setting yourself up to be taxed at a HIGHER rate on a LARGER amount in the future.

As we explained earlier, LIRPs can provide a source of tax-free retirement income if utilized properly. There are two options for using your LIRP as retirement income, but both are tax-free. First, you can use the cash value of your life insurance policy to get tax-free distributions by taking out a loan on your cash value. Since loans cannot be additionally taxed by the government (i.e. car loans, home loans, etc.,) this income is actually tax-free. In addition, the interest you are required to pay on the loan will be offset by the interest you gain on the cash value itself (they cancel each other out). Second, you can also take withdrawals or partial withdrawals from your LIRP, which you will only be charged minimal administrative fees for.

How Do I Get Started?

While Life Insurance Retirement Plans can be an extremely good investment, they can also be complicated to find on your own. It is important to find the RIGHT type of universal policy, with the right insurance carrier, and to understand how to properly use it. The best way to make sure you find a LIRP that suits you and your family’s needs, is to hire a life insurance broker or agent to guide you.

Since not all universal life policies are designed to last an individual beyond the age of retirement, you can’t assume all universal life plans will work as a LIRP. We also recommend that you do not invest ALL your available income into any one type of investment plan. It is important to diversify and disperse your income, ideally, into a few different types of plans (tax-deferred accounts for emergency funds, ROTH IRAs and LIRPs).

To find a plan that meets your financial needs, send us a message for a free quote, or give us a call at 352-957-9142.