LIRP | Life Insurance Retirement Plan (Top 11 Pros and Cons)

The life insurance retirement plan, AKA a LIRP, is a powerful financial tool that offers many benefits and has been used by millions of Americans to protect and secure their financial future. It is essentially a permanent life insurance policy with a cash value component. In the highly competitive financial services sector you will hear advice for many different products and strategies, but rarely will you come across something as safe and flexible as the LIRP.

The following LIRP video provides a case study that offers an excellent breakdown of the benefits of a LIRP as well as an example of a LIRP in action.

If you love to gamble and can’t wait to try the latest and greatest financial scheme, the LIRP is probably not for you. However, if you happen to be conservative with your safe bucket money, and you like to see a steady and secure path to financial freedom, the LIRP may be an excellent choice.

In this article we want to help you understand:

• 1. The benefits of a LIRP,
• 2. Why the LIRP is favored over some other retirement products, and
• 3. Shed some light on the typical critiques of the LIRP.
• 4. In addition, we will present a very basic framework for how a LIRP is structured and can be used to gain the benefits discussed.

So, let’s begin by answering the question,

What Does LIRP Stand For?

LIRP simply stands for Life Insurance Retirement Plan. And in most instances the plans are referring to permanent life insurance plans that provide cash value to the owner.

The two best products for most will be either

• 1. Dividend Paying Whole Life
• 2. Indexed Universal Life

Policy Structured For Cash Value Growth

The good news about either of these permanent life insurance policies is they can be structured so that the focus is on growing your cash value versus a large initial death benefit. The death benefit can grow over time, but the primary purpose of the LIRP is to act as a retirement plan, and so a focus on growing your cash value is key.

Safety and Security

Another benefit of these two products is safety and security, including creditor and bankruptcy protection in most states. Forty years ago when someone heard the word “life insurance” they thought of safety and security.

But today many associate life insurance with slow growth or expensive premiums. Further, most people in the financial sector, and even some in the life insurance industry, advise people to buy term and invest the difference.

We’d like to address some of these criticisms, but first let’s discuss what we think is the optimum method for creating a LIRP.

The Ideal LIRP

The problem: too often people are held captive to the highs and lows of the stock market, which provides much uncertainty and fear, particularly as one nears retirement.

The solution: Provide a safe and stable alternative that you can store your savings in that provides a decent rate of return but with limited to no downside.

There are three things to consider when creating the ideal life insurance retirement plan.

First of all, the ideal LIRP is with a reputable mutual insurance company. We believe mutual companies that are beholden to the policy holders are better choices than the companies that only answer to their shareholders.

Second, we believe the ideal LIRP is with a company that has a proven track record of performance. Not all life insurance companies have great returns year after year. We recommend choosing companies that have historically outperformed their competitors, such as companies with a history of excellent life insurance dividends, or higher participation and cap rates.

Third, we believe the ideal LIRP is with a company that is top rated, flexible and allows for a variety of options. You never know what the future holds, and therefore having a life insurance retirement plan with a company that provides financial security and policy flexibility is a huge bonus.

So with that in mind, let’s take a look at the advantages of a life insurance retirement plan.

LIRP Pros and Cons

We will begin with our 9 LIRP advantages and follow that up with the 2 primary LIRP disadvantages.

1. The LIRP Provides Guarantees and Safety

In 2008 the stock market plunged almost 60% and millions of Americans lost a fortune of their hard-earned savings, to the tune of trillions of dollars.(1)

In the months following the market collapse, people were looking for answers from their brokers and advisors.

But unfortunately for many, the answer was the tried and true “these things happen – stay the course – it’ll all come back.” AKA the “buy and hope” approach.

And thus far it’s true, the market has climbed back. But what about the lost decade of earnings?

For many Americans that had saved with traditional investment strategies, the crash in 2008 was enough to devastate their portfolios. Many saw more than 50% of their portfolio given back to the market in massive sell-offs.

And while it’s true that these Bear markets are typically followed by Bull markets, that isn’t a solid encouragement for those that planned on retiring in 2009 or 2010.

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A Guaranteed Floor

A LIRP provides a floor to your investment returns, also known as a guarantee. The guarantee means that you will never have a year in which you take a loss, and depending on your product choice and allocation you may be able to get a guarantee that you’ll never get less than 3 or 4%.

In order to get the guarantee and the safety that comes along with it, you will give up some of the big gains that come in the incredible bull market years.

So you won’t be getting 20% when the market is booming, instead you may only get 10-13%. But for many that is a price they’re more than willing to pay to get a solid guarantee that they’ll never lose money.

Guaranteed Death Benefit

In addition to guaranteed returns, you also get a guaranteed death benefit. The life insurance death benefit is paid to your beneficiaries income tax free.

And the death benefit on a life insurance retirement plan can be designed to increase each year as your cash value grows, so when you do die, your beneficiary receives the maximum death benefit possible.

2. Starting a Business

Some people like to work for themselves rather than working for someone else. Starting their own business has been a dream of theirs for years. Properly designed life insurance retirement plans provide participants the option to fund their own business without having to approach a banking institution.

In most situations, starting your own business is going to be challenging enough even if you have the money. But most banks consider financing new and innovative businesses too risky, and are therefore reluctant to lend.

With a LIRP you can often borrow money at close to 0% net cost via wash loans and pay it back with flexible terms that work well within your start-up needs.

Flexibility

If you choose a indexed universal life insurance policy as your LIRP, then if you have a slow month and can’t make a payment, that’s okay, you can pay less that month.

If you have a huge emergency and can’t pay your loan payment this month, that’s okay as well. You will never have any penalties for late payments on loans.

The flexibility that comes from a LIRP allows many entrepreneurs to fund ventures that never would have been funded otherwise.

If you’re not an entrepreneur, it doesn’t matter, because the same borrowing feature works for many other situations.

3. Retirement Income in Life and Replacement Income in Death

In life, your LIRP can be used as tax-free income via withdrawals up to your basis or you can borrow against your cash value. Having a steady stream of tax-free income from your policy is a great way to supplement your retirement income.

In death, a life insurance retirement plan provides income protection in the event that you can no longer provide that retirement income for those you love. In the event of your death, the LIRP provides a tax-free death benefit to your beneficiaries.

Long Term Care

And if you have chosen the disability features within a LIRP, you can even provide for you spouse and family if you are permanently disabled, need long-term care or are terminally ill via long term care and chronic illness riders.

While the goal of properly designed Life Insurance Retirement Plan is to provide living benefits for you and your loved ones that last your entire lifetime, one of the key benefits is that it also provides death benefit protection if you die unexpectedly.

The peace of mind that comes from a LIRP is a great advantage, and it’s one reason why the LIRP is sometimes considered a self-completing retirement plan.

4. Hedge Against Rising Tax Rates

Most retirement strategies are either fully taxed, or tax-deferred. What that means is that you either pay taxes every year on the gains you receive from your investments (fully taxed), or you defer taxes on your gains and pay them when you withdraw your funds (tax-deferred).

The LIRP is not like either of these strategies, it is tax-free.

How can a LIRP be tax-free?

First and foremost the money that you invest in typical tax-deferred investments is paid for with pre-tax money. Whereas with a LIRP you pay for it with after-tax money.

So the government has already been paid to some degree. But what about the gains in your investment – when do you pay tax on those?

With a LIRP you will pay taxes on the gains if you choose to withdraw the money.

However, the gains don’t have to be withdrawn to be accessed. You can choose to borrow from your gains instead of withdrawing, and thereby gaining access to your money tax-free.

What about Interest?

The typical question about borrowing from a LIRP is “If it’s a loan, don’t I have to pay interest?”

The answer is yes, and no.

You do pay interest when you borrow from your LIRP, but due to the fact that you also receive interest from your LIRP, the loan typically ends up being a wash loan. These loans are often called wash loans because you earn what you pay, so it’s a wash.

But what does all this have to do with a hedge and rising tax rates? A hedge just means that something is a barrier, or a protection against, something.

In this case, having a tax-free retirement vehicle means that tax rates can rise to 50% and it won’t impact your retirement because you will be accessing your funds tax-free.

In other words, the tax situation for those with life insurance retirement plans are much more secure and predictable than those with other strategies where paying taxes is involved.

5. Penalty Free

We mentioned earlier that you can access your money to fund a new business with a LIRP. But it’s also true that a typical retirement strategy like a 401(k) will allow you to do the same thing. However, with a typical 401(k), the access to your money comes at a cost.

If you access your money prior to age 59.5, you will pay a early withdrawal penalty. The penalty for early withdrawals that don’t mean the hardship criteria is 10%, and of course you are taxed on these as well.

So let’s say you have $100,000 in your 401(k) and you want to withdraw $50,000 from it for a new business on you 48th birthday. At the end of the year your tax liability will include an additional $50,000 in income, and a 10% tax on that amount ($5,000).

If we assume that you already make $80,000 in taxable income, the additional $50,000 would have a 35% tax liability of $17,500.

So the total you would receive for the year, after taking the $50,000 early withdrawal, would be a paltry $27,500. Almost half of your money went to taxes and penalties.

LIRP vs 401k

In contrast, if you had a LIRP with $100,000 cash value and you wanted $50,000 for a new business, you would get the full $50,000 and you would not be taxed or penalized. In fact, the IRS would not even know you accessed the money.

To be fair some 401(k) plans do have a loan provision, but the payback criteria is very strict, there is a loan limit, and it has to be paid back within 5 years. If you change jobs with an outstanding loan, you’re usually given 60 days to pay it back in full. And not all 401(k) plans provide for loans.

6. Entering the Banking Business

This benefit may seem like a stretch to those that have never heard of Infinite Banking or Banking on Yourself, but it’s a concept that has been around for decades.

In short, you are able to use your LIRP to fund various financing endeavors for yourself or others.

Many choose to keep the business within the family and only open up funding to those they know well. However, for those that might want to be a hard money lender, or finance a friend or colleague in their entrepreneurial venture, there are no limits.

In order to be your own banker, you need to use your saved money within the LIRP to finance various ventures.

For example, let’s say you wanted to buy a car. You could choose to finance the car through a credit union or a bank, but why not use your own saved money to finance it as well.

The money in your LIRP is used as collateral for your loan, so there is no need to qualify or apply as is normally the case with financing a car.

You pay your LIRP back with terms that you agree are favorable. If you choose to pay yourself back at 10%, you can do so. If you choose to pay yourself back at 2%, you can do that as well. It’s your money, so you can even decide not to pay yourself back.

Infinite Banking

However, those that really want to use Infinite Banking to the fullest, usually choose to pay themselves back at higher rates, because they want to accelerate their money growth.

In addition, they can choose to lend money to friends and relatives at a good rate with flexible terms.

If you have the option to buy a car with a 0% loan, that’s probably a better deal, but not every financial endeavor offers 0% terms – so the LIRP option is still a great benefit.

Ultimately they’re are a wide variety of options available for the person with a LIRP.

Whether it is banking, college planning, business financing, retirement security, or income replacement, the LIRP remains one of the most flexible and secure strategies available today.

7. Long-Term Care

Life Insurance Retirement Plans also provide protection against the high cost associated with long-term care. Most LIRP policies provide for accelerated death benefits that can be used if you are diagnosed as terminally ill.

You can even add additional long-term care riders or chronic illness riders for further protection.

A long term care rider will protect you if you are unable to perform 2 or more activities of daily living.

A chronic illness rider provides protection if you are diagnosed with a qualifying chronic illness,

8. No Funding Limit

For those who are below the income requirement threshold for funding a ROTH IRA, there still is the problem of limitations on how much you can put into the Roth IRA.

However, there are no limits on how much you can place into a LIRP and there is no income threshold prohibiting you from funding a LIRP, beyond what you can qualify for.

That is why cash value life insurance is referred to as the “Rich Person’s Roth.”

9. Different LIRP Options for Different Objectives

A LIRP can be created using any number of permanent life insurance companies and policies.

For example, you can choose participating whole life, universal life, indexed universal life and variable universal life.

Each type of life insurance coverage has its pros and cons associated with it.

For example, in comparing whole life vs universal life, participating whole life is going to be a safer, more conservative option than variable universal life.

Additionally, some people choose an IUL due to the 0% loss protection but potential for higher gains than whole life.

So there are our 9 advantages of a life insurance retirement plan. Now let’s take a look at a couple of disadvantages or drawbacks to a LIRP.

The 2 Cons of a LIRP

But what do the naysayers have to say about the disadvantages of a LIRP? Well, there are two major criticisms that we hear over and over again.

• First, we hear that permanent life insurance is too expensive.
• Second, we hear that the returns are poor.

Let’s go over these two critiques in detail.

1. LIRP’s Are Too Expensive

Most financial advisors that are critical of permanent life insurance like to compare term vs whole life insurance to shock the reader into a state of disbelief.

They will compare a 35 year old male non-smoker with good health paying for $1 million dollars of insurance. The premiums are just over $1,400 for 20 year term insurance, and almost 10x that amount of whole life insurance.

But this comparison is not fair for a couple of reasons.

First, the comparison chooses the cheapest term insurance to the most expensive permanent life insurance.

If the term was 30 years, the rates would be almost double, and if you choose a different kind of permanent life insurance policy the rates would likely be closer to 5 to 7 times that of term.

In the example of the term premium, the premium is only paying for insurance, while with the whole life premium, a portion of the premium is going to cash value.

In other words, one has a savings component, the other doesn’t. So it’s not an apples to apples comparison.

Further, the term may be less pricey early on, but consider what the term life premiums will be in 10, 20 or 30 years.

What if down the road you want to renew your policy only to find out that your term life insurance premiums are what your cash value life insurance premiums were back when you chose the term vs permanent policy.

You could have locked into a permanent life insurance policy that lasts your entire life and builds cash value that you can access tax free in retirement for the same price you will be renewing that term life policy for.

2. LIRP’s Grow Too Slowly 

It’s easy to listen to someone saying that a LIRP will only get 5% annually, and think that you’ll never be able to retire. And at the same time the financial advisor that is critical of a LIRP is likely to show mutual fund rates of returns that are almost double that of a LIRP.

However, five consecutive years of 10% returns can be easily wiped out by one -40% return. And to make matters worse, you have now lost 6 years.

If you compare two initial investments of $100,000 over the course of 20 years, one of which earns 5% annually every year, and the other that earns 10% annually, you get an obvious result. Everybody wants the 10% return.

However, if your 10% return investment column has just one bad year in which you take a 50% loss, you come out about even in year 20. And if you have more than one year that is bad, you will come out ahead with the 5% return.

Keep in mind this is only comparing rate of return, we haven’t even talked about how much of the money you get to keep (taxes), or how easy it is to access your money.

So there is still some advantages to the LIRP that aren’t being discussed in this context, particularly for those who use the policy’s cash value to fund other ventures, such as investing in real estate.

Retirement is Coming

There are only so many years between now and your desired retirement, and each year counts. Even though you may only get a guaranteed rate of return in a LIRP that is around 4%, that doesn’t mean that you will never get more.

In fact, often times you will get much more, the guarantee is just a minimum amount you’ll get in those years when the stock market is tanking and people are losing their shirts.

Conclusion

The LIRP is a tried and tested financial strategy for retirement and healthy financial living that has been around for decades. At Insurance&Estates we believe this unique and wonderful tool can help just about anyone reach their financial goals throughout their life. If you have any questions about the LIRP, or if you just want to run some ideas by our team, contact us today for a complimentary strategy session.