10 LIRP Pros and Cons – Is A Life Insurance Retirement Plan Right For You?
Millions of Americans have used the LIRP (life insurance retirement plan) to protect and secure their financial future.
You will find many strategies and products in the highly competitive financial sector, but you’ll rarely come across anything as safe and flexible as the LIRP.
If you have been researching or simply just discovered information about life insurance retirement plans.
This article will help you understand the advantages of a LIRP and why it is preferred over other retirement products.
We will also present a basic framework of how a LIRP works and how it can be used to reap the benefits we have discussed. Why do you need a LIRP, you ask?
LIRP Pros & Cons
Who a LIRP is for and who it’s not for.
The LIRP may not be right for you if you are a gambler and want to see the latest financial schemes.
The LIRP is a great option if you are conservative with your safe bucket cash and want a steady, secure path to financial security.
8 Benefits of a LIRP
1. The LIRP provides Safety and Guarantees
The stock market plummeted by almost 60% in 2008, and millions of Americans lost their hard-earned savings to the tune trillions of dollars. (1)
People sought answers from brokers and advisors in the months that followed the collapse of the market.
Unfortunately, many people were wrong. The answer was “these things happen – stay the course – it’ll all back.” Also known as the “buy and wait” approach.
It’s been true that the market has rebounded so far. But what about the decade-long earnings gap?
Many Americans who had saved with traditional investments strategies were devastated by the 2008 crash. Many people saw their portfolios fall by more than half in huge sell-offs.
While it is true that Bull markets tend to follow Bear markets, this doesn’t mean that they are strong encouragement for retirees who planned to retire in 2009 or 2010.
A Guaranteed Investment Floor
LIRP is a guarantee that your investment returns will not be lower than the floor. This guarantee guarantees that you won’t have a year where you lose money. Depending on the product you choose and your allocation, you might be able to get a guarantee that you won’t get less than 3 to 4%.
To get the security and guarantee that it offers, you must give up some of your huge gains from the bull market years.
You may not get 20% in a market that is booming. Instead, you might only get 11-13%. For many, however, that’s a steep price to pay for a solid guarantee that they won’t lose any money.
You Get A Guaranteed Death Benefit
Guaranteed returns are not the only benefit you get. You also get a guaranteed death benefit. Your beneficiaries will receive the life insurance death benefit without any tax.
The death benefit of a life insurance retirement plan can be adjusted to increase as your cash value increases. This ensures that your beneficiaries receive the highest death benefit.
2. Retirement Income in Life, and Replacement Income in the Event of Death
Your LIRP can be used to generate tax-free income during your life. You can either withdraw up to your basis or borrow against your cash value. A steady stream of income tax-free from your policy can be a great way for you to supplement your retirement income.
The LIRP protects income in the event you are unable to provide retirement income for your loved ones. The LIRP offers a tax-free death benefit for your beneficiaries in the event you die.
You can also provide for your spouse and family if the disability features are selected within a LIRP.
A LIRP’s goal is to provide you with living benefits that will last you a lifetime. However, it also offers death benefit protection in the event that you are unintentionally killed.
A LIRP can provide you with peace of mind. It’s also a good option for those who want to retire.
3. Protect yourself against rising tax rates
Many retirement strategies can be fully or partially taxed. This means that you pay taxes each year on any gains from your investments (fully-taxed) or that you defer taxes on gains and pay them when your funds are withdrawn (tax-deferred).
LIRP isn’t like these strategies. It is tax-free.
How is a LIRP exempt from tax?
The money you use to invest in tax-deferred investments is first and foremost paid for with pretax money. A LIRP is paid for with after-tax money.
The government has been paid in some way. What about the investment gains? When do you have to pay tax?
If you withdraw the money from a LIRP, you will be subject to tax
The gains can be accessed without having to be withdrawn. You have the option to borrow money from your gains, rather than withdrawing it. This will allow you to access your money tax-free.
What about interest?
A common question regarding borrowing from a LIRP includes “If it is a loan, do I have to pay interest?”
Yes, but also no.
Although you do have to pay interest when borrowing from your LIRP you will also get interest from your LIRP. So the loan is typically a 0% wash loan. These loans are sometimes called wash loans since you get what you pay.
What does this all have to do with tax rates rising and a hedge?
A hedge is simply a means of protecting something from harm.
This means that you can have a tax-free retirement vehicle. It will allow you to access your funds tax-free, so tax rates could rise up to 50%.
This means that the tax situation for people with a LIRP is more predictable than other strategies in which taxes are involved.
4. A LIRP is Penalty-Free
If you want to take money out of your typical 401(k) early, you will have to pay a penalty.
You will be charged an early withdrawal penalty if you have access to your money before the age of 59.5. Early withdrawals that do not meet the hardship criteria are subject to a 10% penalty. You will also be taxed for these early withdrawals.
Let’s say that you have $200,000 in your retirement plan and want to withdraw $100,000 for a new venture. Your tax liability at the end of the year will be $100,000 more in income and 10% tax on that amount ($10,000).
Assuming you have $80,000 in taxable income, $100,000 more would result in a 35% tax liability for $35,000.
After taking the $100,000 early withdrawal, the annual total would be $45,000. Nearly half of your money was used for taxes and penalties.
LIRP vs. 401k
You could, however, get $100,000 if you had $200,000 in a LIRP and wanted to start a new company. The full $100,000 would be yours and you wouldn’t be subject to any tax or penalties. The IRS wouldn’t even know that you had accessed the money.
Some 401(k), plans have a loan provision. However, the payback criteria can be very strict. There is a loan limit and it must be repaid within five years.
You are usually allowed 60 days to repay any outstanding loans if you leave your job and change jobs. Not all 401(k), plans offer loans.
5. Banking Business Entry
This benefit might seem a bit extreme to people who haven’t heard of infinite banking or Banking on Yourself. However, it’s an idea that has been around for decades.
You can use your LIRP to finance various financial endeavors for yourself and others.
Many people choose to keep their business in the family, and only allow funding to close friends and family. There are no restrictions for anyone who wants to lend hard money or finance a friend or colleague’s entrepreneurial venture.
To become your own banker you will need to use your savings within the LIRP to fund various ventures.
Let’s say that you want to purchase a car. While you could finance the car via a bank or credit union, it’s better to use your savings to finance it.
Your LIRP money is used to secure your loan. There is no need for you to apply or qualify as it is with financing a car.
Your LIRP is paid back on the terms you agree to. You can choose to pay 10% back. Or you can also choose to pay yourself back at 2%. You have the option to decide to not pay back your money.
However, people who really want to make the most of Cash Value Life Insurance can choose to pay back at higher rates because they want to increase their money growth.
They can also choose to lend money at a low rate and with flexible terms to their friends and family.
As you are starti ng to see. A Life Insurance Retirement Plan is a multi-purposeful asset and is leveraged in MANY ways, not just retirement planning.
The LIRP is flexible and secure, whether it’s banking, college planning or business financing.
6. Long-Term Care
The LIRP protects against the high costs associated with long-term care.
Many LIRP policies offer accelerated death benefits, which can be used in the event that you are diagnosed with a terminal illness.
For additional protection, you can add long-term and chronic illness riders.
If you become disabled, a long-term care rider will cover you.
If you have a qualifying chronic disease, a chronic illness rider will provide protection.
7. No Funding Limit
There are still limitations on the amount you can contribute to a Roth IRA for those who earn less than the income threshold.
There are no restrictions on the amount you can put into a LIRP. Additionally, there is no income threshold that will prevent you from funding a LIRP beyond what you may be able to afford.
This is why cash-value life insurance is called the ” Rich Individual’s Roth.”
8. Different LIRP Options for Different Objectives
You can create a LIRP using any combination of policies and permanent life insurance companies.
You can choose whole life or universal life.
Every type of life insurance has its pros and con.
In comparing wholelife vs. universal life, it is clear that participating whole life will be safer and more conservative than variable universal life.
Some people also choose IULs for their 0% loss protection and higher potential gains than wholelife.
What does LIRP stand for?
LIRP stands for Life Insurance Retirement Plan. In most cases, the plans refer to permanent insurance plans which provide cash value to their owners.
When the term life insurance was first used 40 years ago, people thought of safety and security.
Many associate life insurance today with low growth and expensive premiums, due to the deregulation on Wall Street.
Furthermore, many people in the financial industry and even those in life insurance advise that people buy term, and then invest the difference.
We would like to address these criticisms but let’s first discuss our opinion on the best way to create a LIRP.
What is The Ideal LIRP?
It is too much to discuss the ideal LIRP in this article. It’s true, however, that no one retirement plan is the best.
We can offer some suggestions for a LIRP that suits most people’s needs and wants.
The First is the best LIRP. Mutual insurance companies are better than those that answer only to shareholders.
Second We believe that the best LIRP is with a company with a track record of success. Some companies do not have high returns year after year. We recommend that you choose companies with a history of producing excellent dividends.
Third We believe that the best LIRP is with a company, which is highly rated and flexible and offers a wide range of options. It is impossible to predict the future so having a LIRP with a company providing financial security and policy flexibility can be a big advantage.
2 Reasons a LIRP Is A Bad Idea
As you can see for yourself you will find many benefits that come with a LIRP. But as you can imagine there are some drawbacks. There are two main criticisms we hear repeatedly.
We hear first that permanent life insurance can be too costly.
We also hear that returns are low.
Let’s take a look at these critiques in greater detail.
1. LIRP’s are too expensive
Many financial advisors are critical of permanent insurance to shock readers into disbelief.
They will show you a 35-year-old male, non-smoker, with good health who is willing to pay $1 million in insurance. For 20-year term insurance, the premiums are less than $1,400, while for whole-life insurance, they are almost 10x as high.
However, this comparison is unfair for several reasons.
The first is that the comparison selects between the cheapest permanent insurance and the most expensive term insurance.
The rates would almost double if the term was 30 year. If you chose a different type of permanent insurance, they would likely be closer 5x or 7x the term. It’s still quite a difference.
True. But that’s only the beginning.
The term premium in the above example is for insurance only. With the whole premium, however, a portion is going towards cash value.
The difference is that one plan has savings and the other does not. It’s not an apples-to-apples comparison.
Additionally, while the term may seem less expensive early on, consider the life insurance premiums in 10-20 or 30 years.
You want to renew your policy now, but you find out that your term insurance premiums are the same as your cash value premiums back when you selected the permanent policy.
You could have secured a policy that will last you your whole life. It also builds cash value, which you can use tax-free in retirement.
We recommend that clients choose whole-life policies that offer the lowest death benefit and the highest paid up additions.
The structure of a whole-life policy allows the bulk of your premiums to be deposited into cash value savings. Very little is used for agent commissions or the cost of insurance.
This structure has the advantage of not having to pay the higher insurance premiums associated with a LIRP.
It is not about overfunded life insurance, which is in danger to become a MEC . The idea is about toeing the line between life insurance and MEC as described under IRC7702.
2. LIRP’s Grow To Slow
It is easy to hear someone say that a LIRP will not get 5% annually and believe that you will never retire. A LIRP can be criticized by financial advisors who will likely show mutual fund returns rates that are nearly twice that of a LIRP.
Five consecutive years of 10% returns could easily be wiped out with one -40% return. To make matters worse, you’ve now lost six years.
You can see the obvious difference between two $100,000 initial investments over 20 years. One earns 5% every year while the other earns 10% each year. Everyone wants to see a 10% return.
If you have a 10% return investment column that has a single bad year, in which you lose 50%, you will be able to make it even in 20. If you have more than one bad year, the 5% return will be your advantage.
This is not a comparison rate of return. We haven’t even discussed how much you can keep (taxes) or how easy it makes to access your money.
There are still many benefits to the LIRP, but they aren’t being talked about in this context. This is especially true for those who use the cash value of the policy to fund other ventures such as investing in real estate.
Retirement is coming
There is only so much time between now and retirement. Each year matters. You may not get a guaranteed rate return on your LIRP of around 4% but that does not mean you won’t get more.
You will often get more than you think. The guarantee is only for years when the stock market is falling and people are losing all their clothes.
Don’t forget to mention that your LIRP can be used in conjunction with a bank strategy to increase your cash value and earn even greater returns.
The LIRP has been around for decades and is a proven financial strategy that can help you retire comfortably and live a healthy lifestyle.
Verdeo Financial has backed this wonderful tool for over 30yrs and has proven time and time again is can be a great help to anyone who wants to reach their financial goals in their lives.
Please comment below or Contact us today if you have questions about LIRP or just want to share your ideas with our team.