Want a LIRP or Life Insurance Retirement Plan?
LIRP is an acronym that means Life Insurance Retirement Plan; it’s a specially designed cash-value life insurance policy that provides much more than 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 income stream during the policyholder’s retirement years.
There is no income limit to a LIRP — unlike a Roth IRA, no earned income limits exist. This means high-income individuals can also participate in a LIRP strategy.
In this article, we will take a broader look into how this plan works and see an example of how much tax-free income is possible.
What is a LIRP?
A life insurance retirement plan, commonly referred to as a LIRP, it’s a type of permanent life insurance policy that builds cash value – some call it an overfunded life insurance policy or 7702 plan, TFRA and others compare it to infinite banking plans.
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.
There are two types of permanent life insurance policies that are used for creating a LIRP. These are:
While whole life policies can provide a viable framework for a LIRP, universal life insurance can typically provide the best LIRP platform. Specifically an index universal life insurance policy. One reason for this is that universal life policies are more flexible than whole life insurance. However, if you need immediate cash value then whole life insurance with a specific HECV rider will be best. Ask us about the differences.
How does a LIRP Work?
Depending on the type of life insurance policy you choose for a LIRP, you could rack up many benefits and tax-related advantages. These can include generating a market-linked return on the policy’s cash value, but without any downside market risk.
For instance, with an indexed universal life (or IUL) insurance policy, the return on the cash value is based in large part on the performance of an underlying market index, such as the S&P 500 or the Dow Jones Industrial Average (DJIA).
In policy contract years when the index performs well, a positive return is credited to the cash value, typically up to a set maximum, or “cap.” But in return for this somewhat limited growth, in contract years, when the index performs poorly, the cash value will not lose money. Rather, it is credited with a guaranteed minimum, or “floor,” which is frequently in the range of 0% to 1%.
So, not only is your principal protected from market downside risk with an IUL policy, but you can also continue to build upon previous gains without first having to make up for any prior losses in the account.
Now, that’s a win-win situation!
LIRP Pros and Cons
Although LIRPs can offer a source of tax-free retirement income, there are some potential drawbacks to consider as well, depending on your goals for the policy.
The downside of a Life Insurance Retirement Plan
One downside of life insurance retirement plans is that because it’s a life insurance contract, you have to qualify for this type of retirement strategy medically. Because this is life insurance coverage, there is underwriting from the insurance company. If you have any major health issues or terminal illnesses, a LIRP strategy will not work for you.
| Pros | Cons |
|---|---|
| Tax free build-up of the cash value | Higher premium than term life insurance |
| Tax free retirement income | Possible slower growth compared to equities |
| No annual funding limits | May require ongoing contributions |
| Death benefit for survivors | Have a surrender charge in early years |
| Penalty-free access for long-term care needs | Contributions are not tax deductible |
Is a LIRP right for you?
Find out here.
The Power of “Tax Preferral”
Cash value life insurance can be a powerful addition to your overall financial planning. But not just for its death benefit – which, by the way, passes to beneficiaries income tax free. Life insurance policies can provide additional advantages, such as:
- Tax-deferred growth
- Tax-free income
- Other qualifying non-taxable distributions
This is what’s known as the power of “tax preferral.”
In today’s market, you have many options available for saving for retirement. Some of these may provide tax advantages on contributions, growth, and distributions.
But if you’ve already “maxed out” your IRA and other retirement plan contributions, you may be seeking additional tax-advantaged vehicles. That’s where life insurance comes in. By adding permanent life insurance, you can diversify your portfolio from tax consequences. Life insurance can also provide you with flexibility and preferential tax treatment both now and in the future.
Most people don’t think of funding retirement with a life insurance policy. But it can have its place.
Taxation of Assets Now and Later
Other than when held in an IRA (Individual Retirement Account), these investments are generally taxed:
- Stocks
- Mutual Funds
- Real Estate
- Bonds
When held in certain types of accounts, such as traditional IRAs or qualified plans, tax is deferred on the growth and is paid at the time of withdrawal.
- Stocks
- Bonds
- Mutual funds
- Deferred annuities are also in the tax-deferred category.
These assets are unique because they grow free of taxation. But unlike tax-deferred investments, the money can also be withdrawn or accessed on a tax-free or tax-preferred basis:
- Life insurance death benefit
- Some life insurance cash value
- Life insurance loans
- Roth IRA distributions
- Municipal bond interest
Best LIRP Insurance Companies of 2023
Many insurers offer LIRPs. However, there are a few companies that stand out above the rest when it comes to the best LIRP insurance companies. These include:
Allianz – No other company can compete!
Allianz is the best IUL insurance company, and it’s not even close. Here’s why they are the King of IULs.
- Index Rate Lock
- 40% interest bonus option with only a 1% asset charge
- 15% interest bonus option with no asset charge
- Highest Participation Rates
- Multiple Uncapped Index Options
Rate lock is the most potent cash-value life insurance feature ever created, and no one offers it in the life insurance industry but Allianz. They also provide some of the best contractually guaranteed loan rates during the withdrawal phase of a LIRP.
No carrier has maintained its caps, participation rates, and bonuses like Allianz.
Securian
This carrier specializes in the child LIRP and will issue policies at a preferred rate for a child. Even with this, they are still not better than Allianz.
AIG
AIG offers an Income for Life Rider that is a beautiful benefit and can guarantee tax-free income for life.
North American
North American released their Builder Plus IUL 3 in May of 2021. This product is designed for death benefit protection and its long-term solid cash value accumulation potential.
This life insurance retirement plan offers long-term solid cash value accumulation potential through multiple interest bonus opportunities.
They also provide Accelerated Death Benefit Endorsements for critical, chronic, and terminal illnesses. Not many carriers offer the critical illness riser on their LIRPs.
Lincoln Financial
Lincoln’s IUL WealthAccumulate product is among the best LIRPs available due to its interest rate bonus feature and multiplier crediting method. Lincoln probably has the best LIRP on the market, along with Allianz.
Example of Tax-Free Income from a LIRP
Jim, who’s 40, is looking to save additional money for retirement. He purchases an Indexed Universal Life policy and pays $24,000 for 15 years, while he’s still working. The cash value grows tax-deferred for 26 years. If Jim retires at age 67 and chooses to start taking income a year later, he can potentially withdraw $135,114 a year for 23 years on a tax-free basis from the policy’s cash value. And he still has a death benefit in place to protect his family, should he die prematurely.
| Age | Year | Life insurance premium | Life insurance cash surrender | Life insurance tax-preferred income | Income tax-free death benefit |
|---|---|---|---|---|---|
| 41 | 1 | $24,000 | $6,909 | $626,549 | |
| 42 | 2 | $24,000 | $30,787 | $650,246 | |
| 43 | 3 | $24,000 | $56,370 | $675,641 | |
| 44 | 4 | $24,000 | $83,848 | $702,931 | |
| 45 | 5 | $24,000 | $113,356 | $732,256 | |
| 46 | 6 | $24,000 | $145,072 | $763,762 | |
| 47 | 7 | $24,000 | $179,138 | $797,624 | |
| 48 | 8 | $24,000 | $217,902 | $834,048 | |
| 49 | 9 | $24,000 | $259,455 | $873,261 | |
| 50 | 10 | $24,000 | $305,034 | $916,496 | |
| 51 | 11 | $24,000 | $353,889 | $963,011 | |
| 52 | 12 | $24,000 | $406,317 | $1,013,100 | |
| 53 | 13 | $24,000 | $463,516 | $1,067,960 | |
| 54 | 14 | $24,000 | $522,610 | $1,127,054 | |
| 55 | 15 | $24,000 | $586,266 | $1,190,710 | |
| 56 | 16 | $631,191 | $946,786 | ||
| 57 | 17 | $679,594 | $992,208 | ||
| 58 | 18 | $731,766 | $1,039,122 | ||
| 59 | 19 | $788,064 | $1,087,528 | ||
| 60 | 20 | $848,816 | $1,137,413 | ||
| 61 | 21 | $914,411 | $1,188,735 | ||
| 62 | 22 | $985,170 | $1,261,017 | ||
| 63 | 23 | $1,061,506 | $1,261,017 | ||
| 64 | 24 | $1,143,872 | $1,337,498 | ||
| 65 | 25 | $1,232,751 | $1,418,401 | ||
| 66 | 26 | $1,328,534 | $1,503,957 | ||
| 67 | 27 | $1,288,394 | $135,114 | $1,560,144 | |
| 68 | 28 | $1,247,485 | $135,114 | $1,524,382 | |
| 69 | 29 | $1,205,854 | $135,114 | $1,486,880 | |
| 70 | 30 | $1,163,567 | $135,114 | $1,447,574 | |
| 71 | 31 | $1,120,729 | $135,114 | $1,406,426 | |
| 72 | 32 | $1,077,650 | $135,114 | $1,343,193 | |
| 73 | 33 | $1,034,538 | $135,114 | $1,275,399 | |
| 74 | 34 | $991,647 | $135,114 | $1,202,821 | |
| 75 | 35 | $949,281 | $135,114 | $1,125,235 | |
| 76 | 36 | $907,826 | $135,114 | $1,042,438 | |
| 77 | 37 | $866,834 | $135,114 | $1,010,951 | |
| 78 | 38 | $826,487 | $135,114 | $980,720 | |
| 79 | 39 | $786,975 | $135,114 | $951,971 | |
| 80 | 40 | $748,511 | $135,114 | $924,959 | |
| 81 | 41 | $711,241 | $135,114 | $899,870 | |
| 82 | 42 | $675,209 | $135,114 | $876,784 | |
| 83 | 43 | $640,561 | $135,114 | $855,887 | |
| 84 | 44 | $607,400 | $135,114 | $837,327 | |
| 85 | 45 | $575,752 | $135,114 | $821,167 | |
| 86 | 46 | $545,567 | $135,114 | $807,398 | |
| 87 | 47 | $516,764 | $135,114 | $795,976 | |
| 88 | 48 | $489,041 | $135,114 | $786,630 | |
| 89 | 49 | $461,744 | $135,114 | $778,717 | |
| 90 | 50 | $434,179 | $135,114 | $771,562 | |
| Total premiums paid | Total tax-preferred income | ||||
| $360,000 | $1,891,596 |
In this example, Jim contributed $24,000 per year in premium for fifteen years, for a total amount of paid-in premium of $360,000.
But starting at his age 67, Jim was able to access more than $135,000 per year – for the next 23 years – for a total tax-preferred income of nearly $1.9 million. At the same time, Jim’s loved ones were covered by a death benefit that, even after all of the income he accessed, was more than $770,000 when Jim turned age 90.
The LIRP provided Jim and his family with a long-term, tax-free income stream. And, because life insurance policies are considered to be “self-completing” plans, his survivors continued to have a death benefit “safety net”…just in case. See more life insurance retirement plan examples here.
Are You a Good Candidate for a LIRP?
While LIRPs can offer a long list of benefits, not everyone is a good candidate for one of these plans. But, a LIRP could be a good option for you if:
- You are looking for a way to supplement future retirement income
- You have already maxed out your IRA and / or other retirement plan(s)
- You want to make sure that loved ones are covered, even in the event of the unexpected
Is LIRP better than 401k?
One question we get asked a lot is “should I put my money in a 401K or a LIRP?” One recommendation we have is if your company matches your 401k contributions then never pass that up. But if were our money we would never choose a 401k over a LIRP. Here’s why.
- You can lose money in a 401k. Ask anyone who wanted to retire in 2022.
- Your 401k income is taxed when you start withdrawing money.
- You can’t get your money out of your 401k without penalty before age 59 1/2.
- You have max contribution limits to a 401k.
In a LIRP you get these benefits:
- Won’t ever lose money.
- Access your retirement savings with tax free distributions.
- Access money in early retirement before age 59 1/2 without penalty.
- You don’t have contribution limits which can especially help high income earners,
If you’d like to have a conversation and need help deciding between the two our financial advisors can help with a comparison illustration.
How to Set Up a Policy
A LIRP can be a complicated product. You have to design the policy right to maximize cash value growth. Working with a retirement planning specialist like us is recommended before you move forward with the purchase of a policy.
An independent life insurance professional can go out into the marketplace and find the plan that works best for you and your specific goals.
At Insurance Geek, we are affiliated with more than 30 of the top-rated life insurers. So, we will match you with a plan and a premium that fits your budget. Contact us to get started with building your tax-free retirement income stream with a LIRP.
Is a LIRP right for me?
Find out here.
Life Insurance Retirement Plan for Kids
Kids can own their own LIRP too. Because life insurance premiums are based in large part on age and health, children can be ideal candidates for LIRPs due to the low cost of insurance and, with so many years to let the policy’s cash value compound interest, a LIRP can set them up for a lifetime of financial security at an early age.
I am currently 70 years of age and my wife is 68. I have been retired for 4 years and have a high income from investments.
I have been approached to do a LIRP using my IRA as the premium. I have to start withdrawing next year and my wife in two years. We currently have $200,00 in our IRA evenly divided.
Are there benefits or drawbacks for us? We have zero life insurances and no long term care policies.
I think there are still questions to be asked before I can give you a definitive answer. Here are some things I would want to know just off the top of my head.
1. What is your purpose in moving the money? (tax-free income, tax-free gains, upside potential returns on investment with protection from downside risk, generational wealth, pay for LTC needs, leverage your money, all of the above?)
2. Do you need the income from the IRA to live on today?
3. When would you need income from the LIRP?
4. Is generational wealth important to you?
5. Do you want to pass your money to kids or grandchildren?
6. How will you currently pay for LTC costs?
7. Is your health still good enough to medically qualify for a LIRP?
What you are speaking of is what we call an asset shift.
You take assets in a taxable retirement account and move them into a LIRP over time, for example, five years of funding (that will depend on age, premiums, and other things).
People choose this asset shift for many reasons. Some of the reasons I asked above in the “what is your purpose of moving the money” question—
If you do decide to move the money a few things you need to consider.
1. The money you take out of your Traditional IRA will be taxable, so you do not want to take it all out at once.
2. You do not want to try to move all your IRA money into the LIRP at once. It would be best to spread your planned premiums over time so you can keep the death benefit on your LIRP as low as possible and accumulate max cash value.
3. You need time for the money to grow before you start withdrawing money (typically ten years).
If you would like to get some more advice to reach out to the email I just sent you.
How much does Insurance Co. charge for premiums? What are the loan charges or withdrawal charges after a 10-year period .
Thanks!
Hi John, the policy charges are different for every carrier. The premiums are flexible, however. It’s like anything you buy, what do you get in return for those charges. Most carriers do have a wash (interest-free) loan after 10 years in an IUL. There are also participating loan options that allow you to loan out money to still participate in the index gains in return for a small charge. If you would like more answers just contact us and we can help.
Can LIRP premiums paid be stopped before 15 years? If so, in what conditions?
Yes. The premiums are flexible.
To tell the truth, it is so cool that you covered this topic because a lot of people don’t have a clear view of LIRP and all the benefits that they can get from this. I came to the conclusion that LIRP is a really profitable investment which can open huge prospects for you and increase your capital for retirement. From my point of view, this type of insurance has more advantages than disadvantages and pros significantly outweigh the cons because LIRP can make a great contribution to improving your financial state. I think that it is significant financial support and air bag for you and your loved ones in case of unforeseen circumstances. For me, it is smart to invest your money in LIRP because it will pay off to a great extent afterwards. You will relieve yourself from different burdensome tasks afterwards and will be easy in your mind about your future.
Can one fund a LIRP through their Solo 401K, or a self-owned company pension plan?
No.
What is the minimum monthly contribution one can make to a LIRP?
We have individuals who put in as little as $100 a month and up to 700K a year. Please contact us, and we can help you find a plan that works for your situation.
What are important questions to ask and review when selecting a company to manage your LIRP?
Do they offer a rate lock? (only one company does). What are the bonus multipliers, par rates, and index options? I’d start there.