Which Type of LIRP (Life Insurance Retirement Plan) is Right or Wrong for You
Troy Sharpe: There are several ways you can design LIRP. There are several options to choose from when it comes to which type of LIRPs. This video’s going to help you understand those different types, which ones may be good or bad for your particular situation and help empower you with the knowledge to make the best decision.
Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner, professional, and host of The Retirement Income Show. When it comes to LIRP, Life Insurance Retirement Plan, we really have several choices. The first choice is whole life. Whole life is the most conservative. This is one you guys are probably all familiar with. Many of your parents possibly bought you one of these when you were a kid. It’s really safe, it’s fully guaranteed.
They paid dividends and dividends are determined by the company based on their profitability. They do have higher expenses than other LIRPs, but they are fully guaranteed. For the higher expenses, you do get something that’s fully guaranteed. If you look at a whole life illustration, the outcome that you’ll receive on the road 10, 20, 30 years from now, it’s going to be pretty similar to that illustration that you look at from the insurance company.
This can be different with other types of LIRPs. For the higher expenses, you do get something that’s fully guaranteed to grow, to be secure, to be there for you, to provide the death benefit no matter what happens as far as performance of the stock markets or various other, features like expenses. Whole life, it’s a decent option, but it’s for those of you that want absolutely no exposure to the market, even if you’re protected from the market, going down, you just like the, the idea of constantly slowly in increasing your values over time.
The next type we have is Universal Life. Universal Life has lower expenses and there are three different types primarily. We have what’s known as Current Assumption UL, Indexed UL, and Variable UL. Current Assumption UL means that the insurance company gives you an interest rate based on the interest rate environment at that time. In today’s low-interest rate environment, I’m not a big fan of Current Assumption UL, it’s not going to build the most cash value. Now I should say there is actually one more type here, it’s called guaranteed UL.
With guaranteed UL, your hash value goes to zero and the death benefit is fully guaranteed. That’s how that design is structured. Those are not LIRPs, those are strictly life insurance policies, in the sense of, you’re not trying to build any cash value for tax-free income later, you’re simply trying to get a guaranteed death benefit thus, most guaranteed UL does go to zero on the cash value side.
Current Assumption UL, they’re going to give you an interest rate based on the interest rate environment, your cash value should grow over time and you also have the death benefit. Indexed UL is the one that I feel works the best for the most amount of people that we come into contact with. Variable UL. What variable means is your money gets placed directly into the stock market. The big downside to LIRPs are the expenses in the beginning years.
If you compound that with the potential for Variable UL to provide market losses, because the mutual funds go down because the stock market crashed, you could be in a very, very bad situation with your LIRP because the policies cash value could go to zero and with a Universal Life policy that’s variable, if the cash value goes to zero, there’s no more death benefit, the policy implodes and you lost everything you invested.
The reason why index works the best for the most amount of people that we see on with these types of policies is the fact that your principle is 100% protected from market losses. The expenses are lower and more transparent than whole life insurance. If you fit the criteria for somebody who should look at a LIRP or consider a LIRP, one of the defining characteristics and most advantageous features of the index Universal Life policy is the fact that they’ll come with a floor of typically 0%.
This means if the stock market goes down, you lose nothing, but they’ll also come with a cap. In this particular instance, we’re looking at about 15%. Now, different products and the marketplace have different caps, could be 0 to 12, 0 to 16. Some of them are even uncapped, but they’re not tied directly to the US stock market, the S&P 500. They may be tied to what’s called a volatility-controlled index or a dynamic index, which dynamically shifts between stocks and bonds based on volatility. That’s going to be a video towards the end of this series.
For now, for simplicity purposes, we’re going to look at an indexing strategy that’s tied directly to the S&P 500 with a floor of zero in a cap of 15%. When the market goes up, this is the big line here, or the market goes down, and then the market rebounds as it historically has done. If we have a floor of 0 and a cap of 15, we make 100% of the market gain up to 15%. The first year that’s where these lines here. They’re years, 12 month periods.
The first year the market goes up, let’s say it does 20%. Well, your index credit, the amount of interest that you’ll earn is 15% because that’s your cap. You hit your cap. The next year the market goes up, let’s say another 20. Well, you capped out. You made 15%. Now, here is what these little dots mean. This is called a reset feature where every 12 months, the interest that you earned is locked in. It can never be given back if the market crashes.
You won’t lose principal if the market goes down and you won’t lose the previous year’s interest, if the market goes down. Next year, let’s say the market’s up 8%. Well, we’ll get 100% of that gain up to 8% because we did not hit our cap of 15. In this example, the market does 20, 20, 8 we make 15, 15, 8. Now this next year, the market has a 25% correction.
We go sideways, you earn a 0% interest in that year. You don’t lose 20%. You don’t lose 5%. You don’t lose 10%, you lose $0 because the market went down. If it went sideways, you account, you earned a zero, essentially in that year. Now, it’s a new horse race because it’s a new 12 month period. When the market rebounds, it typically rebounds pretty ferociously. If the market’s down 25%, we could expect the 20%, 25%, rebound possibly in the next year, maybe even more. We’re going to make all of that gain up to our 15% cap.
In this example here, let’s say the market rebounds 25%, we go up 15% then those gains are locked in as well. When we’re looking at planning for retirement with one of these tools, if we are comfortable with having money in the market, in which we should be, we don’t want a Variable Universal Life policy, because then you have to overcome the expenses and the potential for market losses. Whereas the index universal life policy still does have the expenses, which we’re going to talk about in the next video in this series, but we eliminate the possibility of market losses.
That is a huge bonus which can protect our cash values in periods of market turbulence. While at the same time, giving us a real reasonable opportunity to average good returns over time. This is why I like the Indexed Universal Life policy over the Variable or the Current Assumption. Typical rates right now in a Current Assumption UL are around 3% or 4%. That’s not really that good for cash value growth in a life insurance policy when you have expenses to be concerned with.
Then the whole life strategy. Again, it’s a fully guaranteed strategy with higher expenses dividends. Right now, some good companies out there are paying between 5% to 6% dividends, but again, the expenses are higher, so your net internal rate of return on these types of policies are right around 2.5% maybe 3% that is still tax-free. It’s a long-term strategy. For those that are more conservative, don’t want any exposure to potential market upside. The whole life strategy might be a good LIRP for you because it is a savings vehicle that’ll grow tax-free and provide the death benefit as well.
Brief rundown on the different types of LIRPs that are available, some of the pros and cons for each, what you need to know to help make good decisions. Hit the subscribe button, hit the thumbs up button, and share this video with a friend or family member. We’re going to continue in the LIRP Series to help you be more connected to your money and make good decisions when it comes to retirement planning.
