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What’s A LIRP And Why You Should Purchase One?

Written by Rob Pinner

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.

What Is a 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:

No Limits on Income

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.

No Limits on Contributions

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.

No 1099’s

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.

Tax-Free Income for Retirement

Withdrawals and loans against the accumulated cash value under your LIRP will always be tax-free according to the current federal law.  One of the most typical reasons for purchasing life insurance is for income replacement.  After retirement, couples need to consider future potential of losing Social Security income.  When one spouse dies, the surviving spouse will receive the higher of the two benefits, not both benefits.

This scenario leads to diminished monthly income for the surviving partner.  LIRP is the appropriate choice to use as a replacement of income once considering the way of life expected for the survivor.

Multiple Growth Strategies

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.

No Legislative Risk

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.

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.

Conclusion

The LIRP is a retirement 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.

Rob Pinner
Rob Pinner

At Easy Quotes 4 You we aim to make your life insurance buying process a smooth and stress free transaction.  We are independent life insurance agents servicing all 50 states. I have over 15 years of experience and have focused solely on life insurance for the past 5 years. If you have any questions or comments please don’t hesitate to give us a call.

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