What the heck is a LIRP and is it a good investment?
LIRP Definition: LIRP stands for Life Insurance Retirement Plan. It is NOT your Grandparents Life Insurance. It is a Life Insurance Plan that is STUFFED full of cash up to the allowable limits in order to take FULL advantage of the TAX -FREE Nature of Life Insurance.
But why use a Life Insurance plan to create Tax- Free wealth?
Before we get into the advantages of the LIRP plan if you have not watched my FREE RETIREMENT VIDEO designed to help you AVOID going broke in retirement please CLICK HERE NOW.
Here are some of the advantages of a LIRP plan:
- Can Help Avoid Stock Market Risk
- Funds Are Accessible WITHOUT Interrupting Growth
- You CAN access growth before age 59 ½ WITHOUT tax penalties
- You CAN use one even if you make too much to Quality for a ROTH
- Your money grows Tax-Deferred
- You can access money TAX-FREE for opportunities or retirement
- The Income you pull out does NOT count against Social Security for taxes
- Your estate value at death is Tax-FREE
- You can access a portion of the death benefit to pay for Long Term Care expenses while you are alive
- You can access a portion of the death benefit if you suffer other life-threatening illnesses while you are alive
- You can create a guaranteed lifetime Tax-FREE income for retirement
That all sounds great but isn’t life insurance for when you die?
No doubt you have seen this product before, right? (look at the picture of the orange box on the right)
What is the first USE you think of when you think of this product?
Did you think of….
- Keeps your refrigerator smelling fresh
- Can be mixed with water to create a toothpaste
- Helps remove odors from carpets
- Can be mixed with vinegar to be used as a bathroom cleaner
- You can make chalk paint out of it
- You can use it for a manicure
- Cleans Patio Furniture
- Tenderizes Steak
Now, what did You think of first?
If you are like most people, it probably was not BAKING!
Yet Baking is right in the name. It is called Baking Soda and that was its original use.
The Arm and Hammer company did a great job of educating the public on the product’s OTHER uses.
In fact, they did such a good job that we often forget that it is a baking product!
Life Insurance companies have done the opposite of Arm and Hammer.
It is hard for us to even think of any other use for Life Insurance than paying out money to our family when we die.
Which by the way the LIRP plan will pass on to your family quicker, easier, and with less tax than probably any other asset you own. But that is not all it can do.
Let us look at just a few of these advantages a little closer…
How A LIRP Helps You Avoid Stock Market Risk?
Many of us have been told to max out our 401K in order to best save for retirement and that is generally a good idea.
But one problem with a 401k is that ALL of the investment choices inside most 401k plans are Wall Street driven and involve at least some level of market risk.
Insurance companies have historically been used as a SAFE asset class as the Insurance Company is under certain legal obligations to hold enough assets in reserves to back the guarantees, they make to their policyholders.
You get NO such guarantees in a 401k.
Your Money Is Accessible!
How important is it to you to have access and control over your own money?
In your 401k, the amount of money you can borrow out is restricted and limited by the plan rules.
Often you are NOT allowed to borrow more than HALF of your own money out at any time except under some very restrictive circumstances.
Then once you borrow the money out your income is immediately garnished until the money is paid back.
Who determines your re-payment terms? You or the 401k rules?
Whose money was it that you borrowed again?
Even though it was your money you borrowed out you have very little say in the terms of accessing it.
Is it wise to tie up money until you are 59 ½ under such strict rules just for a tax deferral, not a tax break but for the putting off of the taxes until later?
What about in a LIRP plan…
- You can often borrow up to 95% of your money out
- You decide how quickly or slowly to pay it back
- Your salary is NOT garnished
- You can opt to make no payments at all for months at a time
- Your money is still growing while you are paying it back
- You are in more control of the process, not your company plan
The money inside a 401k grows tax-deferred.
You are not getting a tax break or tax forgiveness you are simply deferring the taxes until later.
Some say you will be in a lower tax bracket when you retire?
Is that actually true for you?
If you are a good saver do you aspire to live in a worse standard of living in retirement or a better one?
If you plan to maintain the same standard of living or better in retirement and the cost of living is likely to increase over the years you are saving what is the likelihood that you will be living in a lower standard of living in retirement?
Also, have you been paying attention to Government spending lately?
With the way the Government is spending money what is the likelihood that tax rates, in general, will be lower when you retire?
Where do you think tax rates will be 10 years or more from now?
If you said higher than why are you delaying the paying of taxes NOW when they are on sale to in the FUTURE when they are much more likely to be WORSE?
If you use a LIRP plan for a portion of your retirement savings here is what you can expect:
- Growth on your cash value is Tax-deferred
- If you pull money out properly you can create a Tax-FREE income in Retirement
- You can access LUMP SUM amounts of cash in an emergency Tax-FREE
- You can access LUMP SUM amounts of cash for opportunities Tax-FREE
- You can create a guaranteed TAX-FREE Income for LIFE
When Is A LIRP Plan Not Appropriate:
- Not a great option if you are in poor health as you must be somewhat healthy to qualify for the insurance component
- Not a great plan for older people who can not afford to wait 12 to 15 years as a LIRP plan is a long-term financial strategy
- You need to be able to commit to saving a fair amount of money over the next 10 to 12 years so if you cannot follow through this could be a problem
- If you have no one in your life that you love or care to leave money too then a LIRP plan might not be the best investment for you.
Who is a LIRP plan best for:
- If you are currently contributing over and above your company match on a 401k plan, then you should seriously think about diverting some of that overage to a LIRP plan and run a comparison. (we run those for free)
- If you like the idea of tax-free investing but your income does not permit you to contribute to a ROTH IRA than this is an ideal alternative.
- If you are currently paying for TERM Life insurance with one hand while saving in a ROTH or traditional retirement plan with the other than you should do a comparison to see if a LIRP would be more effective
- If you are nearing retirement and no one has been helping you tax diversify your money than strategically moving some money from your tax-deferred bucket to a tax-free LIRP plan could be a great strategy.
- If you are in the same situation as above and currently have NO Long-Term Care Hedge built into your plan the LIRP plan can help with that.
- If you are concerned about what taking a lump-sum distribution from your tax-deferred account due to a health crisis might do to you in retirement and would prefer to have at least some money in a Tax-FREE bucket to better prepare you for this problem then a LIRP plan could be your answer.
While I use LIRP plans on a regular basis for my clients they are not a good fit for everyone.
A LIRP is just one of many financial tools that you should be aware of.
If running out of money and keeping your nest egg safe in retirement is a concern for you then you need to check out my FREE RETIREMENT Video. CLICK HERE NOW
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