LIRP: All you need to know
If you are like most Americans saving for your retirement, you’ve most likely accumulated the bulk of your wealth from two to three investment strategies, which will probably be either taxed or tax-deferred. The problem is that with higher taxes, the wealth that you’ve accumulated could rapidly diminish.
With our national debt quickly expanding and approximately 78 million baby-boomers leaving the workforce, our tax rates are bound to increase. In fact, David Walker (former federal comptroller general), forecasts that our taxes need to double immediately in order to maintain our national debt load.
If raising tax rates seems plausible, then you’d want to consider putting the majority of your assets into a tax-free investment vehicle. Actually, many Americans are looking towards tax-free wealth accumulation and distribution tools, such as a LIRP, in order to avoid the impact of higher taxes.
The life insurance retirement plan, commonly referred to as LIRP, is an impressive financial tool used by millions of Americans in order to protect and secure their way of living well into retirement and beyond.
While there are hundreds of different products and services available in the insurance industry, none offers the safety and flexibility quite like the LIRP. In this article, we will briefly examine the life insurance retirement plan or LIRP’s pros and cons.
What is a Life Insurance Retirement Plan (LIRP)?
A LIRP, or life insurance retirement plan, is a powerful yet simple financial planning tool that’s used for retirement needs and goals. It’s also an accumulation and distribution tool that resembles the tax-free attributes of a Roth IRA, but without the numerous restrictions. When properly arranged, the LIRP offers many attractive features, such as:
Life Insurance Retirement Plan Pros’
If you’re a risk-taker that enjoys the thrill associated with the latest financial scheme, then the LIRP is not the strategy for you. However, if you take a more conservative approach towards your investment choices, the LIRP would be the wisest choice. Let’s take a look at some of the top advantages to choosing a LIRP:
Life insurance retirement plans provide what’s known as a guarantee, which is the floor of your investment returns. This guarantee means that you will never take a loss on your investment. In fact, depending on your LIRP selection, you may even be provided the guarantee that you will never receive less than 4%.
Additionally, a LIRP provides you with a guaranteed death benefit. Upon your passing, the death benefit will be paid to your beneficiary as tax-free income. The LIRP also offers you the ability to design your plan so that your cash value grows each year, which provides your beneficiaries with the maximum death benefit.
No Limits on Income with a Life Insurance Retirement Plan
While there is an income limitation on how much an individual can put into a Roth IRA, a LIRP does not have the same income limitation.
During the time that you are alive, your LIRP provides tax-free income that you can receive as monthly withdrawals or as a loan against your accumulating cash value. This feature provides a great option to replace or supplement your retirement income tax-free.
Additionally, a LIRP has an optional disability feature, which provides payment to your loved ones in the event that you become permanently disabled, terminally ill, or need long-term care. And at the time of your death, the LIRP provides your beneficiaries with a tax-free benefit.
No Limits on Contributions with a LIRP
A total of $5,500 could be put into a Roth IRA, as of 2013, and $6,500 could be entered if the contributor was over the age of 50. However, with a LIRP, you can put in as little as $2,000 a year to as much as $200,000 a year. The only real limitation to your contributions depends on your cash flow.
Funding a Business using a Life Insurance Retirement Plan
Many Americans are choosing to work for themselves, rather than someone else, and beginning their own business has been a goal for years. The flexible LIRP gives its policyholders the ability to fund their own business ventures without having to approach their bank, as well as other financial endeavors.
No 1099’s when using a Life Insurance Retirement Plan
Typically, a 1099 must be filed each year in order to report and pay any tax due on the growth of your investment. However, with a LIRP, your money grows tax-free eliminating the need for 1099’s.
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.
You will pay taxes on any gains if you decide to withdraw the funds, but if you borrow against your gains, instead of withdrawing them, you’ll have access to your funds tax-free.
Long Term Care provided by a LIRP
A LIRP also provides extra protection against the rising costs related to long-term care. Many life insurance retirement plans (LIRPs) offer an accelerated death benefits feature, which provides a payout if you’re diagnosed as terminally ill. You also have the ability to add chronic illness or long-term care riders for additional protection.
Flexibility for Specific Objectives
Essentially, there are three ways in which to grow your cash value in a LIRP. First, you have the ability to opt for the fixed interest feature, which in the past has paid 3-5% annually.
Next, you could strictly rely on the stock market’s performance by way of directly investing into mutual funds. While the potential for growth is powerful with this approach, the potential for loss provides just as much of an impact, as proven by the 2008 market collapse.
A final way to grow your cash value is the Indexing Strategy. Growth is connected to the external index performance, such as the S&P 500, while having a floor of zero. Generally speaking, this means that if the index has a positive performance, you’ll be able to reap the benefits of that performance.
However, if the index is down, you’ll be credited with 0% growth for that year. It has been found that on average, this strategy yields a 7-9% return , making this a great way to accumulate tax-free funds for your retirement.
A secure LIRP can be designed utilizing a number of different permanent life insurance policies and providers. You can choose among whole, universal, variable universal, and indexed universal life insurance plans. With the advice of financial advisor, you have the ability to design a LIRP specific to your needs.
No Legislative Risk with a LIRP
If the federal government decides to make any changes with the LIRP, existing LIRP policyholders will be “grandfathered” in and will continue to reap the benefits of their LIRP.
Life Insurance Retirement Plan Cons’
As with all life insurance products, LIRPS have their cons 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:
LIRP’s are Expensive
Many financial advisors will compare term life insurance with permanent life insurance, such as whole life as a selling point. However, this is really not a fair comparison.
With term life insurance, you are only paying for the actual cost of insurance, whereas with whole 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 whole life insurance premium rate that would’ve given you coverage over your lifetime.
Poor Returns on LIRP’s
While the rate of return is lower than most, the LIRP offers a guarantee preventing a loss on your investment. Even though the growth is slow and steady with a LIRP, you have easier access to your money tax-free.
Why Should I Buy a LIRP?
Cash value life insurance plans offer a great way to save for retirement due to their tax advantages and flexibility. These policies are even more appealing to those that have reached the maximum on contributions on their Roth IRA or 401(k).
The accumulated cash value earned inside a life insurance policy grows on a tax-deferred basis. In fact, loans, withdrawals, and partial surrenders are all tax-free. Furthermore, your beneficiary will receive a tax-free income upon your passing, provided your premiums are current at the time of your death.
Each LIRP policy can be structured to include the components that matter most to you and your financial objectives. If your primary concern is your retirement savings instead of the amount of your death benefit, you have the ability to minimize your cost of insurance.
If, when you retire, you find that you have a modest long-term care insurance policy or none at all, you may want to chose to purchase a combination LIRP policy.
This allows for you to have two types of insurance coverage under one policy. The death benefit is paid with the life insurance segment of the policy, while the long-term care is paid from your assets. This retirement planning tool does vary according to carrier.
The medical underwriting requirements for the LIRP policies is not as intensive as those associate with a traditional long-term care policy. While a medical exam is necessary for some, most of the LIRP policies utilize simplified underwriting.
Essentially, these policies offer the vehicle to primarily fund your long-term health care need or at least provide a guaranteed death benefit to your beneficiary in the vent that you do not need long-term care.
Of course, there is no one-size-fits-all retirement plan present in the market today. But there are some guidelines to consider with a LIRP that does fit most individual’s needs.
First, be sure the LIRP provider is a reputable insurance company. Next, you’ll want to ensure that the LIRP provider has a history of excellent dividends. While not all providers have consistent great returns, it’s possible to find a provider with positive performance in regards to its policyholders’ returns.
Finally, you’ll want to make sure that the LIRP provider offers long-term financial security and policy flexibility.
Retirement is Approaching
Make every year count towards planning your retirement – there are only so many years left! In spite of the fact that the guaranteed rate of return for a LIRP is approximately 4%, you’ll still have the opportunity to earn more. Often times, you’ll receive much more.
The minimum guaranteed rate of return is a safety net to prevent you from losing out if the market performs negatively. Also, keep in mind that you can combine your LIRP with a banking strategy so you can substantially increase your cash value and receive even higher returns.
The LIRP, existing for decades, has been the most advantageous tested and tried financial strategy for both a healthy standard of living and for retirement. This unique and excellent tool can assist nearly anyone looking to reach their financial goals during their lifetime.
If you have questions about whether a LIRP is right for you, contact your independent insurance professional today.
The LIRP or life insurance retirement plan is a vehicle that offers flexibility and tax-free cash value accumulation. However, as mentioned above, the plan must be designed properly, otherwise the expenses will exceed the cash value accumulation.
Consult your independent insurance agent or financial advisor on whether the LIRP is appropriate for you and your family’s needs. Furthermore, in order to fully maximize the benefit of owning a LIRP, buy the minimum insurance coverage needed for your situation, and then contribute the maximum amount permitted according to IRS guidelines. If you have any questions we can be reached here.