Understanding How to Leverage Life Insurance Retirement Plans (LIRPs)

Purchasing vacation homes, visiting grandchildren, traveling abroad, working a rewarding part-time job, and 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 will likely 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. Traditional investment vehicles such as 401ks or IRAs were never meant to become conventional retirement plans. If you are seeking financial security in your retirement years, you will need to pursue alternative wealth building strategies in addition to the typical vehicles. 

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 capabilities, a life insurance policy can also be used as a buffer account for extending passive income from an investment account during retirement. In this article, we will break down the different types of LIRPs, LIRP insurance pros and cons, and how to decide if LIRPs are right for you. 

What are the different types of life insurance retirement plans?

As mentioned above, LIRPs are life insurance policies used to grow cash value to add supplemental income in your retirement years. Life insurance retirement plans come in the form of either a universal or whole life insurance and can be customized to fit your financial goals. If you are unfamiliar with the different types of LIRPS, here is a quick overview of whole life insurance and universal 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 a 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 the policy owner 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. These policies also do not allow for dividends as in whole life insurance options. Both types of universal life insurance pay for the life insurance component through one-year term insurance. This happens to be the most expensive type of insurance over a long period of time. These fundamental differences make whole life insurance better for guarantees than any type of universal life insurance.

One main advantage of LIRPs is that they grow tax-deferred allowing you to use cash values as tax-deferred loans. They also include a death benefit that passes on to your beneficiaries at time of death. 

What are LIRP pros and cons?

Just like any other investment option, 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 LIRPs

  • Security
    LIRPs crafted from whole life insurance policies 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 investment vehicles can provide additional advantages. Other investment vehicles such 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. For this reason, LIRPs can be a great addition to your current retirement plan strategy.
  • Access to Money
    Most retirement plans require a certain age to start withdrawing from investments. For example, if you withdraw early from a 401k or before the age of 59 ½ , you will need to pay a 10% penalty plus income tax. With a LIRP, there are fewer restrictions to when you should access your cash 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 LIRPs

  • Higher Premiums and Payments
    In order to build the high cash value that policy-holders seek to leverage in a LIRP, the policy requires 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 more risky investment vehicles. 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). Older individuals can expect a lower overall IRR around 1-3%. Keep in mind that this Internal Rate of Return would have to be compared to a higher return in any typical financial investment, where the rate of return is reported before fees and taxes, for the same net results.
  • Pay Schedule
    If premiums or interest on policy loans are not paid then this may cause a  policy to lapse. However, this con is within the policy owners control. With an honest agent  and an organized schedule, you should  not have to worry about a policy lapse.

Decide If LIRPs Are Right for You

Life insurance retirement plans 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 will 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 retirement years calm and 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.

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