Lirps – Life Insurance Retirement Plan Guide 2022
Lirps – Life Insurance Retirement Plan Guide 2022
A Life Insurance Retirement Plan, or LIRP, is a specially designed life insurance policy that does much more than just provide a death benefit.
A LIRP is a permanent life insurance plan that simulates many of the tax-free traits of the Roth IRA. A properly funded LIRP can provide large, tax-free, streams of income during the policyholder’s retirement years.
Unlike the Roth IRA and 401k, the LIRP is famous for being the one that you will pay THE LEAST amount of taxes for.
Before going into detail about LIRP, let’s cut to the chase with some simple facts that many people reading this article are looking for:
- When you retire, you CAN take tax-free distributions from your accumulated cash value in the form of policy loans with LIRP.
- It is also possible to take tax-free distributions from your Roth IRA, but Roth IRA doesn’t offer death benefit protection and has limits on how much you can put in it each year.
- Even though your 401k contributions are tax-deductible, the fact is that the income you take from your 401k or IRA is fully taxable.
Not to mention the fact that if you take any money out before you are “59 and a half” you have to pay a 10% early withdrawal penalty ON TOP of the taxes you pay for your 401k income.
- You will not receive a tax deduction when you contribute to a LIRP, but! — you will be able to take tax-free income FROM your LIRP.
Because a LIRP can save much more money in the long run with a clever strategy, many people opt for a Life Insurance Retirement Plan as their go-to financial plan.
With that said, now it’s time to go over exactly who the LIRP is best suited for, and precisely how you can benefit from it.
What is a LIRP, or Life Insurance Retirement Plan?
A life insurance retirement plan, commonly referred to simply as a LIRP, is a type of permanent life insurance policy that builds cash value – some call it an overfunded life insurance policy or 7702 Plan.
Unlike most other permanent life insurance policies, though, that are purchased for their death benefit protection, a LIRP is used more for its cash value and retirement income potential.
The cash value can be accessed tax-free for the purpose of supplementing your retirement income.
How Does Life Insurance Retirement Plan work?
Life Insurance Retirement Plan is a financial planning tool most often used for avoiding large taxes to achieve personal financial goals for retirement.
However, it’s not that simple, and you probably wouldn’t be reading this if it was.
The most used life insurance product for a LIRP is indexed universal life (IUL) insurance. When they’re structured properly, LIRPs will provide the tax-free advantages of a Roth IRA without the contribution limits of a Roth IRA.
It will minimize your expenses and maximize cash value, creating as much tax-free income as possible — that is the main benefit.
It should be emphasized that a LIRP HAS TO be structured properly for the insurer to enjoy maximum cash accumulation growth and tax-free income at retirement.
Is Life Insurance Retirement Planning for you?
Well, it depends. Most of the time, the following types of policyholders can reap MAJOR benefits from a LIRP like in no other type of retirement plan:
- High-income earners who are already contributing to IRAs and 401(k)s are now looking for additional avenues with which to save for retirement.
- Families with special needs children who need constant care — because the death benefit provides all the funds necessary to support the children upon the death of the insured.
- High net-worth individuals with upcoming estate tax issues can absolutely benefit from the tax advantages that come with a LIRP — because the death benefit from the policy can be used to pay these taxes.
If you don’t fit into any of these categories — don’t get discouraged.
Set up a meeting with your financial advisor and see what you can gain from a LIRP — they are on the rise and more popular each day, so new strategies are sprouting, even if you don’t fit in any of these groups.
Death Benefit and Annual Contributions
First and foremost, a LIRP is life insurance, hence the name—Life Insurance Retirement Plan.
The costs of insurance are the fees associated with the LIRP, rather than paying management fees, fund fees, and brokerage fees associated with traditional financial vehicles or accounts.
A LIRP is structured in the opposite manner other life insurance policies are structured.
Traditionally, you want to purchase as much death benefit as you can for as little premium as possible.
This is the essence of traditional term insurance, and even most permanent policies, such as whole life or universal life.
With a LIRP, you want to have as little death benefit as possible while shoveling in as much money as you can per IRS guidelines.
The IRS says we must have a “minimum death benefit” that comes with the policy for it to be considered life insurance and maintain its tax advantages.
Assume that your spouse is in retirement, 68 years old, and you have a LIRP with an index-based account value of $400,000 with an accompanying face amount (fancy word for life insurance coverage) of $150,000 above the account value.
Also assume you have an IRA of $400,000. You pass away.
What’s does the financial picture look like?
The IRA becomes inherited by your spouse, complete with the inherent tax bill that will come due sooner or later and all the strings of qualified accounts (see our post on The Tax Columns).
By contrast, the LIRP’s account value of $400,000 would blossom into a $550,000 tax-free benefit to your spouse. The end. No more strings, no future taxes, or headaches to deal with.
For all the fantastic potential growth features a LIRP can boast, we cannot forget about the invaluable insurance portion of the contract.
Can you purchase more death benefits than the minimum required by the IRS? Yes, but if the goal is to use the LIRP as a retirement tool, we want to minimize fees as much as possible.
LIRP Fees – Lirps – Life Insurance Retirement Plan Guide 2022
The negative press we’ve encountered regarding a LIRP funded with Indexed Universal Life insurance is debatable.
Although you’ll likely find many articles suggesting that the management fees and other expenses are higher with a LIRP if you look closely and compare the fees to the account value, the fees charged in a LIRP are about the same, or in some cases even lower than fees charged in traditional retirement plans.
If we could sum up the objections of detractors to using a LIRP, it would be this: “They’re expensive!”
Often, so-called “gurus” or radio talk show hosts who say such things are referring to ill-structured insurance policies, and forget that alternatives to the LIRP, such as IRAs, 401Ks, or mutual funds also have fees, including the largest expense in the financial world: taxes. Happily, a properly structured LIRP does not have to deal with taxes.
In comparing the fees within a LIRP to alternatives, we can turn to the most popular retirement vehicle in the country, the 401K. Investopedia reports that 401K fees “[range] from 0.5% to 2.0%”. A study by USA Today found that the average cost to a 401K participant (you) is 1-1.5% per year, taking into account mutual fund options, plan custodial fees, recordkeeping fees, and other costs. And what do we get for paying those fees? A monthly statement? Online access? Hopefully professional management, but that doesn’t help us when 2008 comes, or a coronavirus scare hits.
Most LIRPs average about the same, around 1-2% a year over the life of the policy.
In a LIRP, the fees in the early years will be higher than 1-2%.
In the later years, they are often less than the 1-2% average, often significantly less.
So, what does a LIRP cost? When used properly, about the same as everything else. You just get much better features.
- A reasonable rate of return
- Competitive fee structures
Advantages of LIRP or Life Insurance Retirement Plans – Lirps – Life Insurance Retirement Plan Guide 2022
- No limits on income that can be contributed. If you are not qualified to contribute to Roth IRA due to high income, this is an excellent option
- No limits on contributions. If you already max out the eligible contributions to your 401K and IRA accounts, this is an excellent option for you to save more for your retirement. You can contribute as much as you want.
- Growth is tax-deferred and tax-free when withdrawing. This is a significant advantage compared to a usual investment account where you have to pay long-term capital gain tax on investment gain when withdrawing.
- Plans never lose value, except in variable universal life insurance or VUL policy, thanks to floor rates of 0% or 1% when the market declines
- Guaranteed death benefit for heirs, tax-free
- You can withdraw or take loans from the policy as tax-free income
- No penalty when you withdraw before 55 years old. You can start withdrawing from the policy, tax-free, as soon as the cash-value account in your policy can support withdrawal, however young you are
- Access to the accelerated death benefit, should you become ill or need long-term care
- Doesn’t count as income when calculating your social security taxes
People who are risk-averse but want some tax-free retirement income might do well to consider a LIRP.
It’s important to realize that a LIRP is a long-term strategy.
If you don’t or can’t stick with it and make the premiums, you’d be better off with another type of investment.
But the key to a good retirement plan is a diverse portfolio, and a LIRP could have a place in yours.
How Do You Start Your Own Life Insurance Retirement Plan?
Why start a Life insurance Retirement Plan?
To give yourself a Fortune 500 executive retirement plan.
To protect against market loss and maximize your after-tax retirement income.
Will any life insurance policy give you these benefits? No. Not every policy has these benefits and even those that do need the right design to maximize retirement income.
If you or a spouse qualify for life insurance, you can do this.
Mintco Financial has clients across the nation and helps families plan, protect, and preserve what is important by creating a retirement and legacy blueprint.
Schedule your appointment today!
We will review the many options available.