What is a LIRP or Life Insurance Retirement PLan?

| August 06, 2020
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A Life Insurance Retirement Plan, also referred to as an LIRP, is a life insurance policy that is specifically designed to create a tax -free retirement income. It is a permanent life insurance plan that shares similar characteristics to the tax-free traits that are seen in the Roth IRA. A properly funded LIRP can provide large, tax-free streams of income during the policyholder’s retirement years.

"An LIRP is ideal for anyone who wants to avoid the restrictions common to traditional retirement plans, and is concerned about market volatility and wants guaranteed, predictable growth, and to avoid losing money in a market crash," says Pamela Yellen, founder of BankOnYourself.com. "People who tend to live above their means and don't have patience or self-discipline should avoid LIRPs, as they are a long-term strategy."

"If designed and managed properly, LIRPs can provide amazing benefits to individuals seeking tax-free sources of retirement income," says Justin Fort, a financial planner and insurance expert who is also the president of Fort Wealth Management in Austin, Texas. 

"However, if an LIRP is poorly built, unmaintained or mismanaged, it can be an amazing source of heartache, stress and loss of value. This is not a set-it-and-forget-it tool like many term life policies or annuity contracts."

LIRPs use whole life or universal life insurance policies that provide minimal death benefits and instead emphasize growth in cash value. While people with life insurance policies typically pay only the required premium, those with LIRPs shovel in extra money to build a cash value that is invested for growth to maximize withdrawals in retirement, which are tax free.

Among the key features of LIRPs:

  • There is no income limit for opening one of these accounts. That makes them available to people who earn too much to open a Roth IRA.
  • There is no limit on annual contributions. This is a major departure from rules on 401(k)s and IRAs, Keoghs, SIMPLE and SEP plans. Contributions, however, are not tax deductible.
  • As with Roth accounts, there is no annual tax on investment gains and withdrawals of premiums paid to that point are tax free, as are additional withdrawals of investment gains if taken as loans. In contrast, withdrawals from the more common types of plans like traditional 401(k)s and IRAs are added to taxable income.
  • LIRPs have flexible investing options, typically a choice between a fixed return guaranteed by the insurer, or a market-based return from a selection of mutual funds, actively managed and indexed.
  • Unlike many retirement accounts, LIRPs have no penalty on withdrawals before 59.5. Policyholders can withdraw at any time so long as the policy stays in force

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