What is a Life Insurance Retirement Plan (LIRP)?
A Life Insurance Retirement Plan (LIRP) Is a specialized life insurance strategy that maximizes tax deferred retirement savings while protecting your beneficiaries. These plans are designed using permanent life insurance products whereby premiums paid each year contribute towards two key components – Life Insurance Death Benefit and a savings vehicle known as Cash Value.
Life Insurance Death benefit
A permanent life insurance policy is utilized in the design of a LIRP and if death occurs, the insured’s beneficiary will receive a tax-free death benefit. The life insurance coverage can be designed in various ways with a level death benefit (constant throughout the policy) or increasing death benefit.
These policies are considered overfunded meaning after the portion of premium is utilized to cover the insurance costs of the death benefit, the excess amount contributes to a cash value savings account. The cash value savings account, as described below, can be used by the policyholder to provide future retirement income.
Cash Value
Within the life insurance policy, a savings account, known as cash value, grows tax free and can be invested in mutual funds, indexes or fixed income investments. When properly structured, tax favored loans & withdrawals can be used to access the cash value at a later date, creating a stream of cash flow to be used as retirement income.
In theory, LIRP’s are similar to Roth IRAs in that after tax dollars are invested initially while earnings and distributions are income-tax free. With a LIRP however, the investor pays for life insurance coverage and it is necessary for them to have a life insurance need to establish a plan. For many high earners who are phased out of Roth IRAs due to income restrictions, LIRPs serve as a popular alternative.
Flexibility in Withdrawals
Another advantage of a LIRP plan is that it does not have age restrictions that are associated with qualified retirement plans such as 401ks & IRAs. While qualified plans have penalties for early withdrawals and required minimum distributions each year, LIRPs benefit from having more flexibility. In a LIRP plan, you can take withdrawals & tax favored loans at nearly any time.
Insurance Costs and Expenses
When implementing a LIRP plan it is important to work with a qualified advisor to ensure the plans are properly designed and all costs are analyzed in the design. Excessive insurance costs can cause a drag on cash value which is why it is recommended to evaluate the pricing of these products amongst multiple insurance carriers. Additionally, if tax free retirement income is desired, you will want to work closely with your advisor to ensure that tax favored loans are taken in excess of your basis as opposed to standard withdrawals.
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