Life Insurance Retirement Plans (LIRPs)
Gerald L. House MSM
“The Contrarian Investor”
10/6/2016
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. As a matter of fact, it is a plan which has virtually been turned upside down and then flipped sideways.
First, a little background information is needed:
This type of whole life policy was first made popular by a veteran life insurance agent by the name of 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 Secrete 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!
Well, to tell you the truth, all the numbers just refers to the IRS codes which deals with cash value life insurance. And, 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:
Actually, this type of whole life policy has been around for a long time. It was originally used by estate planners for wealthy individuals and businesses. 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.
Basically, you are “over-funding” a life insurance policy to capitalize on the money invested. The accumulation of cash value is the goal not a death benefit.
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 to only believe what has been preached to us over and over again. 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 because 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 which enables you to invest more money into the policy. This technique ensures it will less likely become a modified endowment policy.
These policies can be a great supplement to your retirement funds. One of the best features of this type of investment is the tax free withdrawal of the cash value and no pre-payment penalty prior to age 59 ½ to consider. Also, you do not have a government mandated minimum distribution when you turn age 70 ½.
Let me give you an example of a LIRP policy I recently structured for a 48 year old healthy male:
He will deposit $12,000 per year for 10 years into his policy then not deposit another dime. He will start withdrawing his funds in year 11 for the next 20 years at a little over $10,000 per year. And, there will still be a small death benefit left after all of the withdrawals. So, he invested $120,000 and withdrew over $200,000 and still managed to keep his policy active.
$200,000/$120,000=66.67% return on his investment! This does not even consider the cost of the insurance itself! If you divide this return over a 30 year period it becomes an annual return of 5.56%
As can be expected, LIRPs can be difficult 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 a experienced advisor that has access to insurers who have years of experience with this type of product.
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!
As always, let me know if I can help.
Gerald
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