A life insurance retirement plan (LIRP) is becoming increasingly popular thanks to its minimal risk and tax-efficient nature.
Coupled with responsible leverage, LIRPs offer a powerful solution for those looking to diversify their retirement portfolios while mitigating market risks.
Let’s talk about responsible leverage and how it helps a LIRP solidify someone’s retirement income stream.
Defining LIRP
At its core, a LIRP is a strategy that utilizes life insurance as a vehicle for wealth accumulation, focusing on the long-term growth of cash value within a policy. If you’re a LinkedIn connection of mine, you know I talk about this a lot.
Also known as Premium Financed Life Insurance or Leveraged Life Insurance, LIRPs offer a way to grow tax-free wealth for retirement outside the traditional avenues of stocks and bonds. Here’s a brief overview that breaks it down.
The Mechanics of LIRP
LIRPs operate on a simple yet effective premise: instead of paying minimum life insurance premiums monthly over an extended period, you make a larger contribution for a shorter term—typically 5, 7, or 10 years.
This front-loaded approach turns your life insurance policy into an actively growing asset, with the insurance company providing a return on the cash value.
Historically, leveraged LIRP returns have ranged between an effective 8% and 15%, offering a compelling growth rate with guaranteed downside protection.
The Role of Responsible Leverage
The concept of leveraging in LIRPs involves using borrowed capital to enhance the investment in your life insurance policy, thereby accelerating the policy's cash value growth.
I know, I know. You’re going to ask why you’d take on debt when you don’t have to. Here’s why: When a qualified lender adds a lump sum to the LIRP, they’ve effectively amplified the policy's growing power many times over. The risk is clear: you forfeit the growth if you don’t pay your insurance policy premium.
Leverage is underwritten based on the value of your policy. Like a mortgage, the bank recognizes the asset and will provide funds. This strategy capitalizes on life insurance's fixed-asset nature, making it particularly appealing during volatile market conditions, such as a bear market.
Do LIRPs Offer Tax Benefits?
Yes. I believe one of the most compelling aspects of LIRPs is their tax-efficient nature.
The policy's cash value growth is tax-free, and distributions can also be taken tax-free, providing a significant advantage over taxable investment accounts.
This feature makes LIRPs an attractive option for those seeking to maximize their retirement savings without increasing their tax burden. I frequently speak with financial advisors and CPAs about the tax element, and LIRPs are becoming increasingly valuable.
You can utilize our complimentary retirement tax calculators to determine if this strategy might work within your retirement portfolio: