Understanding Pros and Cons of LIRP

What is a LIRP and How Does it Work?

A life insurance retirement plan (LIRP) is a strategy to use your permanent life insurance policy, such as indexed universal life or whole life, to build your retirement funds while you’re protecting your family with life insurance.

This is how it works:

• You pay the monthly or annual premium on your life insurance.
• A part of your premium covers the cost of insurance, and the rest goes towards building the cash value.
• The cash value growth potential varies based on policy type. While the returns may fluctuate, certain policies like whole life insurance may provide a guaranteed minimum rate.
• After building a substantial cash value (that often takes years to build), you can borrow or withdraw funds, including as a supplement to retirement. But withdrawals can reduce the death benefit for your beneficiaries.

A LIRP might be suitable for you depending upon your financial situation. Before opting in, evaluate the pros and cons and decide whether this long-term commitment aligns with your life goals. And, consult a qualified professional who can help you understand how LIRPs work.

Pros of a LIRP

Investing in LIRP can be advantageous due to the following reasons:

• Tax-Deferred Growth: The cash value component on your permanent insurance policy grows tax-deferred. This means you don’t pay tax on the gains. However, taxes may apply when you withdraw funds and the amount withdrawn exceeds the total premiums you’ve paid. Withdrawals can also reduce your policy’s cash value and death benefit for the beneficiaries.
• Lifelong Coverage: A LIRP is part of a permanent life insurance policy and is valuable not just for retirement but also for legacy planning. This means you can protect your family financially while you’re also saving money for retirement.

Cons of a LIRP

Before choosing a LIRP, here are some drawbacks to keep in mind:

• High Costs: Because they’re a part of permanent life insurance, premiums are higher than a comparable term life policy. 
• Volatility: The growth of the cash value component is sometimes tied to a market index implying that returns can go up or down based on market performance. While most policies include a minimum guaranteed rate to prevent losses, growth isn’t guaranteed and can vary each year.
• Risk of policy lapse: Additionally, if you skip a premium payment, overborrow, or withdraw from your policy’s cash value, the  death benefit can decrease and there could also be a loss of coverage and policy lapse.  Plus, if you withdraw more than the total premium you have paid, there could be a tax liability. 

Cash value is a differentiating factor between a permanent and term life policy. However, it is better to analyze if the difference in premiums and the additional amount you pay for the ability to grow cash value is worth it.

Who Might Benefit from a LIRP?

A LIRP might make sense in some cases. These include:

• Individuals who earn a high income 
• Individuals looking for diverse tax-saving options
• Individuals who want to set up a strong estate plan and want to leave a legacy for their family while taking advantage of tax-deferred growth
• Individuals who have maxed out other retirement accounts

Common Misconceptions and Mistakes with LIRPs

• The return on a LIRP is not guaranteed. In most cases, there may be applicable caps on the growth rate.
• Typically, there isn’t a lot of flexibility built around skipping your life insurance premiums if you’re also trying to use your policy as a LIRP. If you skip too many premium payments, your policy can lapse. 
• Consider estimating the cost of building cash value in comparison with other investment options.
• Relying solely on a LIRP for your retirement is probably not sufficient. It’s generally a good idea to keep your investment portfolio as diverse as possible.