(DailyChive.com) – As the population of senior citizens continues to grow, so will the need for retirement accounts. In 2019 only about half of American households claimed an established retirement account. But of that fifty percent, over twenty percent held a balance of over $100,000, and seven percent stashed away more than half a million dollars for their golden years.
Depending on the type of retirement account, employment, and income status, most retirement accounts come with tax liabilities and contribution limitations.
In addition to traditional savings, 401Ks, and other investment accounts, a Life Insurance Retirement Plan, or LIRP, gives high earners another option to prepare for retirement.
What is a LIRP?
Technically, a Life Insurance Retirement Policy or LIRP account is a cash-value life insurance policy. The LIRP offers no contribution limits and tax-deferred growth. With a LIRP, policy owners may borrow money against the cash value of their account.
A LIRP account protects your principal investment, but the account’s growth depends on the market’s activity that supports the life insurance policy. However, the LIRP will still grow by about one percent even when the market performs poorly.
Who Benefits from a LIRP?
Most people who set up LIRP accounts earn incomes well into six figures. Typically, they also maintain a traditional retirement account such as a 401K. However, due to their high income, they max out the allowed contributions relatively early in the tax year; the LIRP gives them another option to add to their retirement savings.
The other type of individual who purchases a LIRP account sets it up as the exclusive source of retirement savings. These individuals are risk-takers since, during economic struggles, they may see very little growth through their LIRP investment. Most argue that when it comes to retirement savings, diversification makes sense. But, for those individuals who choose a LIRP account exclusively, the tax benefits and limitless contributions make sense for their income level and situation.
How to Add a LIRP Policy to Your Retirement Portfolio
If you think a LIRP might make sense for you, consider the steps below to get the most out of your policy:
- Contact an independent agent with expert credentials in retirement life insurance policies. Using an independent agent will give you the advantage of someone who works with multiple insurers to compare prices and the intricacies of the policies.
- Determine how much coverage you will need that fits within your budget. Factors such as your age, health, and debt owed will affect the amount of coverage to obtain and the cost of the policy.
- With the help of your agent, shop for an appropriate policy.
- Determine if you wish to make monthly, quarterly, or annual payments to your LIRP account. Understand that with most LIRP accounts, you may also make extra payments or premiums.
- Once you’ve established an account, make sure to monitor it routinely. If your life circumstances change due to marriage, divorce, the death of a partner, or the birth of a child, you’ll most likely want to adjust your policy.
Advantages of Life Insurance Retirement Policies
LIRPs represent an excellent option for those who maxed out of their 401k or Roth IRA. Some of the other advantages of LIRPs include the following:
- You may obtain a loan from the cash value of your LIRP. You may need the loan for supplemental retirement income or emergency expenses. However you use the funds, there is no tax liability.
- Contributions and premium deposits to your account are limitless. You can save as much as your income allows.
- The deposits you make are tax-deferred, so when you withdraw money during your retirement, the tax liability will decrease substantially.
- Unlike most retirement accounts, with a LIRP, you may access your money before turning 59 ½.
- Technically, you won’t lose money with a LIRP. With the built-in floor rate, your principal won’t decrease, and you will see a return of at least one percent.
- With the death benefit, your beneficiaries won’t pay taxes on their inheritance from the LIRP.
Cons of a LIRP
Purchasing a LIRP doesn’t make sense for everyone. They work best for high earners with low debt ratios. When you shop for a LIRP, you may find a few disadvantages:
- LIRPS are expensive. A LIRP monthly charge will typically cost 10 to 20 times more than a standard life insurance policy.
- If you’re unable to make your payments, your policy will most likely lapse. However, most policies will reinstate if you pay back costs and fees within two years of defaulting on your payments.
- LIRPs are challenging to research. You won’t find information readily available online regarding rates or market performance. Most people need more reliable data to work with a knowledgeable agent.
For most people, a diversified retirement portfolio makes the most sense. But, if you’ve exhausted your saving ability through more conventional retirement tools such as a 401K or IRA, you may need to check into a Life Insurance Retirement account.
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