Life Insurance Retirement Plans (LIRPs)
Do you know where many affluent investors place some of their money for retirement? Well, believe it or not, they invest in whole life insurance. But, wait a minute; this is not your typical whole life policy. It is a plan which has virtually been turned upside down and then flipped sideways.
First, a little background information:
This type of whole life policy was first popularized by a veteran life insurance agent named Nelson Nash. He coined the term “Infinite Banking.” Since then, this type of policy has attracted many more nicknames such as: “Bank on Yourself,” “Live Your Life Insurance,” “702 Plan”, 770 Plan, The “Secret Code,” and others. Believe it or not, there is even a company promoting it as an event called “Financial Freedom Boot Camp,” and you must pay to attend!
All the numbers refer to the IRS codes that deal with cash value life insurance. Additionally, you do not need to shell out additional money to attend a boot camp to get information on this program.
Second, this concept is not new:
This type of whole life policy has been around for a long time. Estate planners originally used this type of policy for wealthy individuals and business owners. Of course, when the 2008-9 recession hit us, it became popular among the masses because of its guaranteed accumulation rate of 3-5%.
Yes, this is a good return, even in today’s economy!
Now, let’s get to the nuts and bolts of this program. Most whole life insurance is sold for the death benefit. However, a LIRP is sold to maximize the accumulation account without turning the policy into a “Modified Endowment Contract.”
A modified endowment contract is so deemed by the IRS when more money is going into the life insurance contract than the IRS allows because it exceeds the benefits received. As a modified endowment contract, it becomes taxable.
You are “over-funding” a life insurance policy to capitalize on the money invested. The accumulation of cash value, along with the death benefit, is the goal.
I bet you are asking yourself these questions:
Why would anyone put excess money in a life insurance policy?
Isn’t putting money in a whole life insurance a bad investment?
However, sometimes our minds are preprogrammed only to believe what has been preached to us repeatedly. Don’t believe everything you hear—didn’t your Mom teach you that?
The best way to take advantage of this type of policy is to purchase your policy from a mutual life insurance company. These companies pay dividends, which can be reinvested into the policy as additional paid-up insurance. This method accelerates the growth of the cash value in the policy. You also want to purchase a term rider on the policy to increase the death benefit in the early years, enabling you to invest more money into the policy. This technique also ensures it will less likely become a modified endowment policy.
Whole Life policies, if structured properly, can be a great supplement to your retirement funds. One of the best features of this type of savings vehicle is the tax-free withdrawal of the cash value and no pre-payment penalty before age 59 ½ to consider. Also, you do not have a government-mandated minimum distribution when you turn age 72.
As can be expected, LIRPs can be challenging to structure. Do not expect to go down to your local insurance agent a purchase one. Chances are, they might not even know what you are talking about. You will need to speak with an experienced insurance advisor who has access to insurers who have years of experience with this product type.
Finally, I know some of you reading this post may want to know why I only concentrated on one type of LIRP and did not talk about structuring a LIRP under an Indexed Universal Life (IUL) policy. Well, because IULs are an inferior product! I only endorse winners!
Butler, K. D., & Mattei, B. (2011). Live Your Life Insurance.; An Age-Old Approach Revitalized. CreateSpace Independent Publishing Platform.
Nash, R. N. (2008). Becoming your own banker: The infinite banking concept. Birmingham, AL: Infinite Banking Concepts.
Yellen, P. G. (2014). Bank on yourself: The life-changing secret to growing and protecting your financial future. Boston, MA: Da Capo Press, a member of the Perseus Books Group.
Investment and advisory services are offered through Herrington Financial Services, Inc., a Registered Investment Advisory (RIA) firm. This article's information does not constitute an offer to sell securities or a solicitation of an offer to buy securities. This article is for educational purposes only. All information in this article is the expressed opinion of the author and not Herrington Financial Services.