Life Insurance Retirement Plan (LIRP) – Are they right for you?
What is a life insurance retirement plan (LIRP)?
A life insurance retirement plan, also known as a LIRP, is a cash-value life insurance policy that provides tax-deferred growth and the ability to access the cash value component through policy loans. It is one of the few retirement income strategies that does not have contribution limits, making it a popular choice for high-net-worth individuals.
Life insurance retirement plans offer a wide variety of benefits that other life insurance policies and retirement accounts do not. If you own any permanent life insurance policies that have a cash value, you can use them as a tax-free income stream for retirement.
What are the pros of LIRPs?
A life insurance retirement plan is a great way to put extra money away for your retirement. If you are already maxing out your 401k and Roth IRA, then LIRPS are great options for you.
You can take out a loan against the cash value of your LIRP
One of the key benefits of a LIRP is that it allows you to take out a loan against your policy’s death benefit. This can be used to cover unexpected expenses or supplement your income in retirement. And because the loan is tax-free, it can be a powerful tool for minimizing your tax liability.
First, you’ll need to contact your insurance company and request a loan against your policy’s cash value. The company will then send you a loan agreement, which you’ll need to sign and return.
Once the loan is approved, the company will issue a check for the amount of the loan, minus any fees and interest charges. The great thing about taking out a loan against your life insurance policy is that you don’t have to worry about making monthly payments.
Instead, the loan will be deducted from the death benefit when you die. So if you need supplemental money during retirement this could be a great option for you.
No limit to how much you can save
Most people are familiar with whole life insurance policies, which offer a death benefit and a cash value component. What many people don’t realize, however, is that there is no limit to how much you can add to the cash value portion of your policy.
You can make additional deposits into the account at any time, and the money will grow tax-deferred. This makes whole life insurance an attractive option for people who want to save for retirement or other long-term goals.
The fact that there is no limit to the amount you can add to the cash value of your life insurance policy, makes it great for high income earners and super savers. This allows for more retirement savings while also having the benefit of a permanent life insurance policy.
In addition, the death benefit can be used to cover final expenses or leave a legacy for your loved ones. So if you’re looking for a flexible way to save for the future, whole life insurance may be right for you.
Tax-free income
Another advantage of a LIRP is that the death benefit is typically income tax-free. This means that your beneficiaries will receive the full value of the policy, without having to pay any taxes on it.
The policyholder can also take out a loan against the policy, tax-free, as long as it isn’t more than the cash value of the policy. Tax-free distributions can be used for any purpose.
Access to your money before 59 1/2
Lastly, LIRPs offer you the ability to have access to your money before you turn 59 1/2, unlike most other retirement accounts. This means you have access to your money now, not having to wait till you are retired.
Plans never lose money
Though there are some exceptions, most universal life and whole life insurance plans never lose money. Even when the stock market is crashing there is usually a built-in floor rate so none of your money is lost.
Can be used for long-term care needs
A LIRP is a long-term care insurance policy that can be used to cover the costs of nursing home care, in-home care, or other long-term care services.
While the monthly premiums for LIRPs can be expensive, the policy can save you money in the long run by paying for care that would otherwise come out of your pocket.
Are there any cons of LIRPs?
Life insurance retirement plans are expensive
There’s no getting around it – universal life and whole life insurance plans are very expensive. While term life can cost as little as $20 a month, LIRPs will likely cost you 10 to 20 times more than that.
While term life insurance policies are great while raising a family, they do not offer any of the other benefits life insurance retirement plans do. If you are not already maxing out your other retirement accounts, then the high cost of LIRPs is most likely not worth the benefits they offer.
If you are unable to pay your premiums your policy may lapse
If you are unable to pay your life insurance retirement plan premiums, your policy will lapse. While this may seem like a worst-case scenario, there are a few options available if you find yourself in this situation.
First, you may be able to reinstate your policy within a certain period (usually two years) by paying back all of the premiums that you have missed, plus interest.
Alternatively, you may be able to take out a loan against the cash value of your policy to cover the premium payments. However, if neither of these options is available or feasible, your policy will lapse and you will no longer be covered.
So if you’re having trouble making premium payments, be sure to reach out to your life insurance company as soon as possible to explore your options.
It is difficult to shop around for a policy
If you’re shopping around for universal life insurance or another form of cash-value life insurance, you may be in for a rude awakening. The cost of a policy can vary widely, depending on factors like your age, health, and even your occupation.
And to make matters worse, most insurance companies don’t list their rates online. So how are you supposed to know if you’re getting a good deal?
The best way to shop for cash value life insurance is to use an independent agent. These agents work with multiple insurers and can help you compare policies and prices.
They can also answer any questions you have about the different types of coverage available. And best of all, they’re usually free to use!
So if you’re thinking about buying universal life insurance, be sure to shop around and get multiple quotes. And don’t forget to use an independent agent to help you through the process.
Who should consider a life insurance retirement plan (LIRP)?
High earners
For most retirement accounts, like a Roth IRA, there are salary limits when it comes to contributing. The current rule for 2022 is if you make more than $144,000 filing single or over $214,000 for married couples. Of course, always talk to your tax advisor before making any decisions.
If you make too much to contribute to an IRA then a Life Insurance Retirement Plan could be for you. With the tax advantage and diversification from a standard stock portfolio, it could be the perfect way to sure up your retirement.
You plan on carrying life insurance into retirement
If you are someone who isn’t interested in short-term life insurance then a life insurance retirement plan could be for you. Permanent life insurance premiums are much more expensive than term life insurance, but without the added benefits talked about above.
If you had planned on holding your life insurance coverage up until death then the dual benefit of life insurance retirement plans makes a ton of sense. You can use the cash value of your permanent life insurance plan, while also having the death benefit to help support a spouse or pass it down to children.
How to set up a life insurance retirement plan (LIRP)
The first thing you need to do is decide how much coverage you need. This will depend on factors such as your age, health, and the amount of debt you have. Once you have an idea of how much coverage you need, you can start shopping around for policies. Be sure to compare the same type of policies from different companies to get the best deal.
When you’re ready to purchase a policy, you’ll need to provide some personal information such as your name, address, date of birth, and Social Security number.
You’ll also need to decide how you want to pay for your policy. You can choose to make monthly, quarterly, or annual payments. You can also add additional payments to the cash value of your policy. These payments are called “premiums.”
Once you have a life insurance policy in place, it’s important to review it regularly and make sure that it still meets your needs. If your circumstances change (for example, if you get married or have children), you may need to adjust your coverage.
You should also keep an eye on the cash value of your policy. This is the money that will be paid out to your beneficiaries if you die. over time, the cash value of your policy can grow substantially. This is the part of the policy that you can borrow for retirement income.
A life insurance policy can be a helpful tool in financial planning, but it’s important to understand how it works before you purchase a policy. By doing some research and shopping around, you can find a policy that meets your needs and provides peace of mind for yourself and your loved ones.
Things that affect the cost of a life insurance retirement plan (LIRP)
There are a lot of factors that go into how much your life insurance coverage will cost. Some of these factors are within your control, like whether or not you smoke, and some of them are out of your control, like your family health history. But knowing about all the factors can help you understand why your quote is the way it is, and maybe even give you some ideas for how to lower your rate. Here are some of the things that affect the cost of permanent life insurance policies:
-Your age: The younger you are, the cheaper your rates will be. This is because younger people are generally healthier and have a lower risk of dying. You also have a longer period that you will be paying your premium and gaining interest.
-Your health: If you’re in good health, you’ll get a better rate than someone who isn’t. This is because healthy people are less likely to die prematurely.
-Your family health history: If you have family members who have died young from an illness, you may be considered at higher risk and pay more for your policy. This is because there’s a greater chance that you could inherit the same illness and die young as well.
-Whether or not you smoke: Smokers pay higher rates than nonsmokers because they’re at a greater risk for developing health problems. If you are currently a smoker, you aren’t only doing your health a disservice, but you are also missing out on additional money you could be saving each month.
-Your occupation: If you have a dangerous job, you’ll probably pay more for life insurance because there’s a greater chance that you could die while working. For example, rates for firefighters and police officers are usually higher than average.
Is a life insurance retirement plan (LIRP) a good investment?
When it comes to retirement planning, there are a lot of options out there. 401ks, IRAs, and life insurance retirement plans are just a few of the most popular choices. So which one is the best option for you?
That depends on several factors, including your age, income, and investment goals. However, life insurance retirement plans have a few advantages that make them worth considering.
For one thing, they offer tax-deferred growth, which means you can earn interest on your investments without having to pay taxes on the gains.
Additionally, life insurance retirement plans offer flexibility in terms of how and when you can access your money. You can take out loans against the policy or use them as collateral for other investments. And if you die before you retire, your beneficiaries will receive the death benefit, which can help them cover expenses like medical bills or funeral costs.
All things considered, life insurance retirement plans offer a lot of potential benefits that make them worth considering for your retirement planning needs. And while they may not be right for everyone, they could be a good option for you depending on your specific circumstances. Talk to a financial advisor to learn more about whether a life insurance retirement plan could be right for you.
Conclusion
A life insurance retirement plan, or LIRP, can be a great way to save for retirement if you are a high earner or looking to put away extra money outside of your 401k or IRA. However, they are very expensive and if you fail to make the payments your insurance could lapse. Before opening an account, be sure to speak with your financial advisor to decide if this product is right for you. Keep in mind that some people may try to sell you a LIRP even if it’s not what is best for you; so always do your research before making any decisions about your finances. Have you ever considered using a LIRP? Let us know in the comments below!
