Life Insurance Retirement Plans (LIRPs) have gained traction among those looking for creative ways to approach retirement income. Combining life insurance protection with the potential for tax-deferred growth and tax-free withdrawals, LIRPs may appeal to individuals seeking to diversify their income streams beyond traditional retirement accounts. However, as financial advisor and author David McKnight emphasizes in Look Before You LIRP, they’re not a one-size-fits-all solution—and understanding their structure is essential before deciding if they belong in your financial strategy. In this article, we’ll review some of his key points to help you learn more about this topic.
What Is a LIRP?
A Life Insurance Retirement Plan is not a specific type of product but rather a strategy that uses a cash value life insurance policy—often indexed universal life (IUL)—to build a source of potential retirement income. The policy is typically funded with after-tax dollars, and over time, its cash value can grow based on market index performance (subject to caps and floors). Policyholders may access that cash value later in life through tax-free loans and withdrawals, if structured correctly.
Why People Consider LIRPs
LIRPs have gained popularity due to several features that may appeal to certain individuals, especially high earners or those who have already maxed out other retirement savings options. Common motivations include:
- Tax-Free Withdrawals: Unlike traditional IRAs or 401(k)s, loans from a LIRP are generally tax-free if the policy remains in force.
- No Income Limits or RMDs: There are no income restrictions for contributing to a LIRP and no required minimum distributions (RMDs) in retirement.
- Death Benefit: In addition to tax-advantaged cash value, a LIRP also provides a death benefit, which can offer legacy planning advantages.
David McKnight’s Perspective: Use Caution and Clarity
In Look Before You LIRP, David McKnight emphasizes that while LIRPs can be a powerful planning tool, they are not appropriate for everyone. He outlines strict criteria that should be met before using a LIRP, including:
- All other retirement savings vehicles should already be funded.
- The LIRP must be structured for maximum efficiency, with minimum insurance cost and maximum cash accumulation.
- The client must be healthy enough to qualify for life insurance at reasonable rates.
- The LIRP should be used to complement—not replace—a broader, tax-aware retirement strategy.
His caution stems from the complexity and potential misuse of these policies. A poorly designed LIRP can underperform or even lapse, leading to tax consequences and a loss of coverage. McKnight warns against using LIRPs without full understanding, particularly if they are pitched with overly optimistic projections or without attention to long-term sustainability.
Potential Downsides to Be Aware Of
While the benefits of LIRPs are compelling, there are also risks and drawbacks to consider:
- Costs and Fees: Insurance policies have internal costs—including mortality and administrative charges—that can eat into returns.
- Long-Term Commitment: LIRPs generally require long-term funding to be effective. Underfunding can jeopardize the policy’s ability to grow.
- Loan Risk: Taking loans from a policy comes with interest, and if not managed properly, those loans can reduce the death benefit or cause the policy to lapse.
- Complexity: Structuring a LIRP for tax-advantaged income requires expertise. Missteps could lead to unexpected tax liability or policy failure.
Is a LIRP Right for You?
LIRPs may be a viable component of a diversified retirement strategy—but only under the right circumstances. David McKnight advocates for their use when they meet a clearly defined need and are implemented with precision and transparency. If you’re considering a LIRP, it’s important to:
- Review your existing retirement savings strategy.
- Assess your long-term goals and current tax exposure.
- Work with a financial professional who understands how to design and manage LIRPs correctly.
Look Before You LIRP—and Plan Ahead
LIRPs offer a unique way to combine life insurance with potential tax-advantaged income, but they require careful consideration and planning. As McKnight points out, the key is not whether a LIRP can work, but whether it should work for you based on your financial landscape.
If you’re interested in exploring how a LIRP could complement your retirement income strategy, let’s start a conversation. At Paraclete Wealth Management, we help you evaluate the pros and cons so you can make informed decisions about your future.