Why is a LIRP so powerful?

A LIRP is so compelling because of how the IRS treats the taxation of this plan. A LIRP offers beneficial tax treatment during both the accumulation phase and distribution phases like most retirement plans; however, what makes the LIRP so unique is favorable tax treatment upon death. It’s the only plan that can maximize the assets you pass on to the next generation (yeah, that legacy money).

The funds in a LIRP track market indexes like the S&P 500, Dow Jones Industrial Average, and more in its cash value account – and the money grows tax-deferred, just like in an IRA or 401(k).

Traditional IRAs and 401(k) allow you to build up funds tax-deferred, but Uncle Sam gets a portion of your withdrawals (i.e., tax) in the future. But a LIRP gives you the option to grow the cash account tax-deferred AND access the money tax-free.

While you are allowed to benefit from growth of the underlying indexes in a LIRP, you don’t incur losses when the index has a down year. So, your gains can continue on top of previous growth, without having to “make up” for any previous loss.

Even if the underlying index(es) performs poorly in a given time period, a LIRP will simply credit the cash account with a 0% for that period. This can be nice in times like the 2008 Recession and the 2020 COVID-19 crisis (and corresponding stock market dip).

Unlike IRAs and employer-sponsored retirement plans, LIRPs do not impose an annual contribution limit. So, even if you have “maxed out” these other accounts, you can still continue adding to a LIRP, and in turn, keep accumulating funds on a tax-advantaged basis.

LIRPs are often referred to as “self-completing” because if the unexpected occurs, your loved ones will still have access to the death benefit funds on an income-tax free basis.

How it works

A LIRP is a permanent life insurance strategy that mimics many of the tax-free characteristics of the Roth IRA without the income limits, market risk, portfolio volatility that you can suffer in other retirement plans.

Most retirement plans are advantageous during the accumulation and distribution phases, but they are not ideal for the transfer of wealth from one generation to another.

A LIRP is excellent for maximizing assets and preparing them for transfer to beneficiaries upon your death, leaving a lasting legacy to your heirs that they will never forget. What if your grandkid’s kids remember your name.

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The 3 Phases

The accumulation phase of a LIRP refers to the period when an individual is contributing premiums into the policy and building up the cash value of their investment.

The unique thing about the accumulation phase of a LIRP vs. other retirement plans is that if you die during this phase, your money is heavily leveraged and would pay your beneficiaries a death benefit. If you were to die young, this death benefit can self complete the goal.

One more characteristic of a LIRP is the cash value in your policy can track a market index such as the S&P 500 and participate in the up year while having zero market risk in the down years.

The accumulation phase is then followed by the distribution phase, in which retirees start obtaining and using their funds.

What makes this phase so unique is that the IRS allows you to take your distributions income tax-free when it is drawn from the cash value of your policy. Income from a LIRP can be withdrawn as three methods: a withdrawal, loan, or participating loan. If you have ever heard of the “be your own banker” strategy, then you may be familiar with the phrase participating loan.

As a bonus, the funds in the cash account continue to earn interest, as if they had never been accessed. Wealthy individuals and families have been using this strategy for decades to grow, protect, and access their money in a tax-advantaged way, and to give them more control. But you don’t have to be rich to take advantage of the benefits that a LIRP can offer.

Because a LIRP is a life insurance policy, it offers tax-advantaged wealth transfer options, too. Survivors can receive the death benefit free of income tax.

The direct passage of these funds will allow them to avoid the costly and time-consuming process of probate and go directly to those you have named as beneficiary. This can enable you to leverage the money you’ve earmarked as an inheritance for loved ones and or contribution to a favorite charity.

A well funded and designed LIRP can allow an individual to take distributions from a policy totaling two or 3x the monies paid into a plan (sometimes more if you start young). At the same time, you still have a significant tax-free death benefit to pass on to the next generations.

How does a Life Insurance Retirement Plan stack up

Whether you’re in the accumulation, retirement or estate maximization phase of life, the right mix of financial tools can help minimize your taxes and maximize your assets.

401 K ROTH IRA LIRP
Tax Free Accumulation
Tax Free Distributions
No Market Risk
No Annual Contribution Limits
Income Tax-Free Death Benefits
No Income Contribution Limit
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How do I get a LIRP

Step 1

First, you need to determine if an LRIP is the right plan for you. So we’ve built a quick questionnaire to help. It’s a short 12 questions form which will help you decide if you are the right candidate.

Step 2

Once you complete the questionnaire, we analyze it and start building a plan to meet your desired outcome. Your answers on the questionnaire will help us design a tailored plan to achieve your desired goals.

Step 3

The final step is to review your illustrations with one of our advisors. We will explain it and answer any questions. Once we have developed the perfect plan, the final step is to apply and complete the underwriting process.

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