As an advisor, I am often asked about, or run into people that have LIRPs, or Life Insurance Retirement Plans.
LIRPs have been around for decades now and seem to come and go in popularity. They are cash value, investment based life insurance policies that can provide some tax benefits and investment protections when utilized correctly. I am torn on the effectiveness of LIRPs as I have seen few work out, and many fail, costing people a lot of their hard earned money.
To consider a LIRP, you first have to have a need for, and qualify to purchase life insurance. This will be a large expense and drag on the investment performance as the insurance company is going to take the premiums right from your investments every month.
There have been a lot of flavors of the LIRP over the years, but the most popular one available today, that draws on the strengths of all the previous versions, is the IUL, or Indexed Universal Life policy. This policy allows you to invest your money into an indexed investment, usually the S&P 500, but there are others you can also choose. The amount you can invest is determined by your age and the amount of life insurance you are purchasing.
While index investments inside products like LIRPs and annuities have some benefits, like being relatively inexpensive and not losing any money in a down market, they also have several drawbacks that people should be aware of.
First is the fact that the investment returns are usually capped. This means that there is a maximum return you can earn over a given period of time, say per year. The insurance company can also change the caps, and often lower them, thus decreasing your ability to grow your indexed investment. Some people are happy to give up some upside potential in return for downside protection, so this can be a benefit.
Second is the fact that you don’t participate in any of the dividends within the index you are investing in. A little fact that seems to be left out of most indexed investment sales presentations I find. How big of a deal are the dividends in say the S&P 500 over time? Take a look at this chart showing the long term growth of the S&P 500 with and without the dividends being paid and reinvested. It’s a pretty large difference over time.
My goal isn’t to scare you away from LIRPs, at least not entirely anyway. They can be a great tool for the right people. If you make a ton of money, have maxed out everything else you can invest in for retirement, like your IRA, 401k, etc., then a LIRP and a good financial planner might be right for you.
If you are curious to know more about LIRPs, from a fiduciary advisor that will shoot straight with you about them, both positives and negatives, then give me a call or shoot me an email. You can also learn more about LIRPs in my book – Divorce the IRS, how to defuse your biggest tax time bombs before you retire.