A life insurance retirement plan, or LIRP, utilizes cash value life insurance structured for optimal growth to increase cash flow in retirement. For some, it is their sole source of retirement income. Others use LIRPs to supplement distributions from a 401(k) or other qualified retirement plan. And LIRPs can even be used as a volatility buffer after a market downturn, helping to protect your nest egg. But is a LIRP a good investment?
In this article, we’ll explain the basics of investing in a LIRP and why it may, or may not, be the right strategy for your retirement goals.
HOW A LIFE INSURANCE RETIREMENT PLAN WORKS
To set up a LIRP, you must qualify for whole life insurance. Eligibility is primarily based on your health, and the healthier you are when you apply, the better rating you’ll receive from your insurance company. Better ratings equate to more favorable premiums, which you’ll pay monthly, quarterly, or annually.
When you pay a LIRP premium, it covers the policy’s death benefit and administrative costs/fees. But unlike term life insurance, your premium is also reflected in a built-in savings account called cash value. Most types of permanent life insurance are cash value life insurance, but what sets participating whole life insurance apart from other types of permanent policies is that it earns a guaranteed rate of return plus non-guaranteed dividends. Both of these factors grow your cash value beyond what you pay into it. This is the investment portion of a LIRP.
You can access your cash value at any time in the form of withdrawals, and any investment gains beyond what you’ve paid into your policy will be taxed at that time. However, if you choose to access your cash value in the form of a policy loan, borrowing it from your insurer with your policy as collateral, the funds are tax-free. In this way, you can enjoy a tax-free retirement with a LIRP. Any unpaid policy loans and interest will be deducted from your death benefit at the time of your passing.
WHY A LIRP IS A GOOD INVESTMENT
In addition to tax-free retirement dollars, LIRPs from mutual insurance companies are one of the safest forms of retirement savings. Your guaranteed rate of return isn’t directly tied to the market and is protected against market volatility. Retirement planning with a LIRP allows a degree of certainty you can’t get with most other investments.
Hoping to retire early? If you’re planning to retire before age 59 ½, a LIRP is a good investment because you won’t be penalized for accessing funds. In comparison, 401(k)s charge a 10% penalty if you take early distributions. Speaking of distributions, when you pull money out of your 401(k) or IRA/Roth IRA, only the funds remaining are eligible for growth. For example, if you have $1 million in an IRA and you take a $100,000 distribution, the remaining $900,000 can increase or decrease in value, based on your investment performance. With a LIRP, if you have $1 million in cash value you take a $100,000 tax-free policy loan, you still earn a guaranteed rate of return and non-guaranteed dividends on $1 million. A LIRP is considered an AND asset: Every dollar can be borrowed AND invested at the same time.
IS A LIRP RIGHT FOR YOU?
There are two main categories of people who utilize LIRPs. The first are individuals who have maxed out annual contributions to qualified retirement plans like 401(k)s or IRAs and are looking for additional, tax-advantaged ways to increase their nest eggs. The second group are individuals with a low appetite for risk. This group can be divided into two sub-groups: those who divide investment funds between a qualified retirement plan and a LIRP, and those who solely utilize a LIRP for retirement. If you’re worried at all about the value of your qualified plan diminishing, a LIRP may be a good investment, as you can take distributions from your qualified plan when the market is prosperous and rely on funds in a LIRP after a market downturn.
It’s also important to consider your family’s needs after you’re gone. Will they need the death benefit a permanent insurance policy provides? If you use your cash value for tax-free policy loans to fund retirement and the outstanding loans are deducted from your death benefit, will there be enough left for your family? On the other hand, if you don’t have children or other beneficiaries to care for, you may be in a position to use as much of your cash value as possible without worrying about whether or not a significant death benefit remains.
The Wealth Strategist at Paradigm Life are LIRP experts. In fact, they own and utilize LIRPs themselves. If you’re curious about whether or not a LIRP is a good investment for you, who better to ask than someone who trusts this proven strategy for their own family?