Understanding How to Leverage Life Insurance Retirement Plans: Understanding LIRP Pros and Cons

Purchasing vacation homes, visiting grandchildren, traveling abroad, working a rewarding part-time job, or taking up a new hobby are all common goals for new retirees. The problem is most of these things cost money. In addition to your lifelong goals, unexpected medical needs or family crises may become an added expense during retirement. No matter what you choose to do for retirement, you need to be financially prepared.

Typical financial planning is failing most people even when they think they’re doing it right. Conventional retirement plans such as 401ks or IRAs were never meant to replace pension plans, but rather to supplement other retirement savings and income.. If you are seeking financial security in your retirement years, you will likely need to pursue further wealth building strategies in addition to today’s typical retirement plans. 

What is LIRP Insurance?

Life insurance retirement plan (LIRP) is a term used to describe a financial approach to supplementing your passive income in retirement with a life insurance policy. Because of its cash value accumulation, a life insurance policy can also be used as a buffer account for temporarily replacing passive income from invested accounts during market volatility in retirement. In this article, we will break down the different types of LIRPs, LIRP pros and cons, and how to decide if LIRP insurance is right for you.

What are the different types of life insurance retirement plans?

LIRP insurance is a life insurance policy used to build cash value to add supplemental income in your retirement years. Life insurance retirement plans come in the form of either universal or whole life insurance products and can be customized to fit your financial goals. If you are unfamiliar with the different types of LIRP insurance, here is a quick overview of whole life insurance and universal life insurance. See this article for further information on the types of life insurance.

Whole Life Insurance 

Whole life insurance is a permanent life insurance product that will last the entire lifetime of the person who is insured and provide an income-tax-free death benefit to the beneficiary(ies) of the policy. Whole life insurance is the only life insurance product available today that develops equity for the policy owner. Participating whole life insurance is a type of whole life insurance that pays dividends when the insurance company generates a profit.

Universal Life Insurance 

Indexed universal life and variable universal life insurance are two common types of universal life insurance. When using universal life insurance, the client assumes a lot more of the risk, and the insurance company can change many of the provisions in the contract. Unlike participating whole life policies, universal life insurance policies do not paydividends. Both types of universal life insurance pay for the life insurance component through one-year term insurance. Because of this, universal life insurance is the more expensive type of insurance over a long period of time. These fundamental differences make whole life insurance better for long-term guarantees in LIRP insurance than any type of universal life insurance.

What are LIRP insurance pros and cons?

As with many things, life insurance retirement plans come with their own set of pros and cons. Recognizing advantages and disadvantages for LIRPs will give you greater context for making financial decisions.

Pros of LIRP Insurance

• Security
  LIRPs designed using whole life insurance come in very handy for retirees when the market experiences a turn for the worse. Instead of drawing income from their retirement accounts and destroying principal during market down years, they can use cash value provided by their LIRP.

• No Contribution Limits
  Choosing a LIRP along with traditional investmentscan provide additional advantages. Retirement planssuch as 401ks and IRAs have contribution limits which cap the amount of money you can invest. LIRPs allow you to “contribute” higher premiums leading to greater cash value growth in the long-run. A LIRP is not always considered “better than” a 401k on its own, but depending on someone’s financial situation, an LIRP can provide more options and flexibility throughout life as you save for retirement. For this reason, LIRPs can be a great addition to many retirement strategies.

• Access to Money
  Most retirement plans impose an early withdrawal penalty. For example, if you take an early withdrawalfrom a 401k before the age of 59 ½ , you will pay a 10% penalty plus income tax. So, when can you withdraw from a LIRP? Anytime you like. With a LIRP, there are few restrictions on when you can access your accumulated value.

• Dividend Payouts
  With a whole life insurance policy, you have the opportunity to “participate” in the profits of the insurance company through dividends.

Cons of LIRP Insurance

• Higher Premiums
  In order to build the high cash value that policy-holders seek to leverage in a LIRP, such a policy will require decently-sized premiums. Without foresight, these premiums can be perceived as a disadvantage. However, the price of these payments is outweighed by the long-term benefits.

• Lower Rates of Return
  In some cases, LIRPs have a comparatively low rate of return to other investment vehicles with more risk. However, depending on your age and health, a whole life insurance policy can generate an internal rate of return (IRR) around 3-4% (premiums to cash value) over time. Older individuals can expect a lower overall IRR around 1-3%. Keep in mind that this Internal Rate of Return would need to be compared to a higher return in a typical financial investment, where the rate of return is reported before fees and taxes, for similar net results.

• Premiums and Interest are Required
  If premiums or interest on policy loans are not paid the policy could lapse. However, this con is within the policy owner’s control. With a knowledgable agent and an organized approach, you should not have to worry about a policy lapse.

Is LIRP Insurance a Good Investment?

Technically LIRPs are not investments at all since they are a guaranteed insurance product. Life insurance retirement plans can serve a number of purposes from financial peace of mind for families, to supplementary passive income in retirement. Many people can benefit from using life insurance as a part of their retirement planning. People who may recognize the greatest benefits from an LIRP include those who:

• Realize standard retirement plans won’t be enough and want to be responsible for their future
• Want to save more for the future and access cash value / savings along the way
• Want more safety & guarantees for their financial future than they can get in the stock market 
• Want more flexibility for their passive income and withdrawal strategies in retirement.

Final Thoughts

We all seek the peace of mind that comes with financial security. Proper planning can make your golden years much more enjoyable. We’d love to talk to you about how a life insurance retirement plan could work for you. Many advisors will pick their ideal financial strategy and ask you to plan around it. At Life Benefits we recognize that no one can predict the future (not even a financial advisor) and believe in tools that provide guarantees and options for your future so you can create the best financial strategy around your unique situation.

If you are interested in learning more, schedule a complimentary strategy session with us.