LIRPS are becoming very popular financial planning tools, but what is a LIRP, who should invest in one, and knowing that they’re not right for everyone, what are the pros and what are the cons?
Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) and host of The Retirement Income show.
So LIRP stands for life insurance retirement plan. Every year, more and more people are investing their money into a LIRP, and they can be very, very powerful tools, but they’re not for everyone.
So we’re gonna go through who should consider investing in these today, why you should consider investing in them, and what are some of the pros and cons to help you make a good decision whether this type of financial planning tool is appropriate for you.
So life insurance retirement plan, we’re talking about permanent cash value life insurance here for the purpose of providing death benefit coverage, providing tax deferred growth, tax free income later in life, access to medical benefits, such as long term care or disability protection, and creditor protection from lawsuits, and also creditors in case you have to file bankruptcy.
So it’s a more sophisticated financial planning tool, because it can be very complex, you have to understand not only the structure of these, but how to take income out, how to structure that properly, how to stay on top of it, because it’s not something you can just set and forget, and everything will be okay. So you really have to understand these before you start to consider incorporating them into a financial plan.
So first and foremost, you must have excess income. From a financial planning perspective, you should always be maxing out your 40k, at least to the point where you get your full company match, because that’s a 100% gain on your investment and that is free money, you want to take advantage of that company match. So those who have excess income, they’ve put as much as they can into the 401k, they don’t have any debt, they’re not concerned about having payments that they can’t afford, they’re looking for more places to stash money away into various investments for diversification and future income.
You should want or need death benefit protection, and also wanting asset protection here. So wanting or needing death benefit protection means you have kids, you’re married, you have income that may have to be replaced if something were to happen to you, maybe you’ll have kids in the future and you want to secure your life insurance today. But you should not consider a LIRP if you have no need for the death benefit. This is the primary purpose of life insurance. And asset protection, as I said, every dollar that you put inside one of these is protected from creditors and lawsuits. So very important here.
Number three, you’ve maxed out your 401k up to the match. So if your employer is going to give you a 4% or 3% or 6% match, and you’re saving for the future, you want to put money into that account so you can get that free money. Once you’ve maxed out your 401k, if you still have excess income, and you want the death benefit protection, either now or you’ll want it in the future because you plan on having kids, maybe if you’re younger, we can start to consider if a LIRP is appropriate for you.
Tax Free income. So this is one of the biggest reasons why people put money into a LIRP. This is why they’re becoming ever so popular and more and more people each year are putting money into these with the goal of taking tax free income out in the future. So we’re going to have an entire series about LIRPS So you can learn how these work And we’re going to spend an entire episode talking about how to take income, how that feature works, what we need to be aware of and what we need to be cautious of when it comes to taking tax free income.
These tools have been around for probably closer to 40, 45 years, but they’ve evolved so much over the years that the products in the marketplace today are completely different from the products that were available even 10 years ago, but especially 30 or 40 years ago. The ones that we’re going to focus on are designed for the conservative investor that has a long time frame.
Now there are several different ways to earn interest inside these depending on which type of LIRP that we implement, but the ones that from my experience work best, they’re going to be better for people who are conservative investor and this is an absolute must, these are not short term tools, these are not something where you put money in today and then you want to take it out tomorrow. It’s almost like buying a home, where we have to let it mature, we have to let it grow, we have to let it build equity, and then down the road, as a financial planning tool, we’re going to reap a lot of benefits while also having protection and security while it’s growing, and life is progressing, but absolutely need a long timeframe and these are more designed, especially the ones that we’ve seen work the best for people over the years, for those who are conservative investors, they don’t want 100% of their money inside the stock market, they’re not happy with low bond yields and they want alternative options that can provide the death benefit, that can provide principal protection with the potential for double digit returns. But again, probably most importantly for you is the tax free income component.
You want liquidity. Liquidity is one of the main reasons why people use these life insurance retirement plans, because when you put money inside your 401k, or in a retirement account, you can’t touch that money for the most part until you’re 59 and a half. So one of the big positives about LIRPs is that as you’re putting money into it, and it’s growing over the years, if you’re 35, or 40, or 45 or 50 years old, and you need to go in and borrow money from there, you don’t have the same government restrictions that you do with a retirement account.
So I’ve seen these marketed as college planning tools, which I’m personally not a huge fan of, but if you do have the excess income, they could supplement college funding. If you lose your job, this could be an emergency fund, although we still want to see the three to six months in savings to go along with one of these. But the liquidity feature is a big benefit over your 401k or retirement account because you don’t have the 59 and a half age restriction and also you can take money out of here for any reason, it doesn’t have to be a hardship withdrawal and you have to qualify under one of the certain government restrictions.
These are some of the big bullet points that we need to know and if these all hit you, as far as your your concerns, your objectives, thena LIRP maybe a good financial planning tool for you and we’re going to go through methodically how these can benefit you, what you need to know, as part of this series on LIRPS.
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