If you haven’t checked your 401(k) for the past six months (and you probably shouldn’t), you’re in for a bad surprise. The S&P 500 has fallen by 20% since the start of the year, and analysts say stocks have yet to hit bottom. The bear market has some people looking for other places to stash their retirement money, and it’s raised interest in life insurance retirement plans, or LIRPs. A LIRP uses the cash value of a whole life insurance policy to supplement your retirement income.
What Does LIRP Stand For?
LIRP stands for life insurance retirement plan, and it’s a type of whole life insurance. Whole life insurance is a policy that covers you for your entire life, as long as you continue to pay the premiums. The cash value of a whole life policy grows over time, and you can access it through loans or withdrawals.
With a LIRP, you use the cash value of your life insurance policy to supplement your retirement income. The money grows tax-deferred, like a 401(k), and you can take tax-free withdrawals starting at age 59 ½. You can also use the death benefit to pay for final expenses or leave a inheritance for your heirs.
Is a LIRP a Good Investment?
The answer to this question depends on your financial situation and goals. If you’re looking for immediate income during retirement, a LIRP might not be the best investment for you. The money in a LIRP grows slowly at first because a portion of your premium goes to pay the insurance company for the death benefit.
Once the policy is paid up (usually after 20-30 years), the cash value starts to grow more quickly. If you need income right away, you might be better off investing in an immediate annuity or using a home equity line of credit.
On the other hand, if you’re looking for a way to leave an inheritance for your heirs, a LIRP can be a good investment. The death benefit is paid tax-free to your beneficiaries, and they can use the money to pay off debts or final expenses.
401(k) Are Being Hit Hard
Search traffic for “LIRP” has spiked since May, amid the current stock market slide. Videos about life insurance retirement plans have amassed nearly 200 million views on TikTok, many of which paint them as ways to accumulate wealth without mentioning their downsides.
While LIRPs isn’t a retirement panacea, they can offer tax advantages to people who have already maxed out other tax-advantaged retirement accounts. They also offer some risk.
Some Pros and Cons
One of the biggest benefits of a life insurance retirement plan is the ability to borrow from it tax-free, says Clint Haynes, a certified financial planner and founder of NextGen Wealth. This may reduce your death benefit if you don’t pay back the loan, so it’s only a good option for people with no dependents.
LIRPs usually have no contribution limits, and you can defer taxes on your contributions until you retire when you’ll likely be in a lower tax bracket.
Many whole life insurance policies make you wait before you can cash out, or else you have to pay a penalty. They also come with fees that can be “quite sizeable,” Haynes says.
“Factoring in the fees it could be 10, 15, 20 years before you start to come out ahead,” he says.
Because of this, you have to be willing and able to commit long-term to make it worthwhile.
Who Should Invest In a Life Insurance Retirement Plan?
When it comes to saving for retirement, a life insurance retirement plan should not be a top priority. You should first prioritize things like:
- Emergency savings
- Investing enough in your 401(k) to get a full employer match
- Making the maximum annual contribution to a Roth IRA if you’re eligible
- Making the maximum annual contribution to a 401(k)
- Other savings goals like paying for your children’s college education or buying a house
“It has to be for somebody in a very specific circumstance that has already checked those boxes beforehand,” Haynes says.
And as a life insurance product, term life insurance is more appropriate for most of the population, Haynes says. A LIRP makes sense for people with enough income who are looking for alternative ways to save money long-term. That’s why it’s a good idea to talk to a financial expert like a financial advisor or insurance agent before diving in.
When it comes to protecting your family and keeping your finances safe. Life insurance makes sense. Give us a call for a quote today!