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Life Insurance Retirement Plans
377 Plays3 years ago
What do you get when you cross liquidity, reduced tax liability in your retirement years, and a name that sounds like a toad enjoying a milkshake? A LIRP (life insurance retirement plan). Although the name lacks a certain flair, a LIRP is an investment and tax strategy that allows you to use the cash value in your life insurance policy to not only be your own bank but also provide a place to direct cash for future tax free withdrawals of cost basis or liquid access through policy loans.
This week, we talk more about what a LIRP is, who should consider one, and how this option compares to and can work alongside other retirement/investment options such as 401ks, ROTH IRAs, and brokerage accounts.
As always, our discussion is for education only and should not be construed as advice. Definitely get a hold of your personal tax and/or investment advisors for additional information to see if a life insurance retirement plan is right for you.
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Transcript
Introduction to The Uncommon Life Project
00:00:01
Speaker
Everyone dreams about living an uncommon life, but how we define that dream is very different for each of us. And for most, it's a lifelong pursuit. Welcome to the Uncommon Life Project podcast. We're going to introduce you to people who are living that life or enjoying the journey to get there. We're going to also give you some tools, tricks, and tips for starting or accelerating your own efforts to live an uncommon life.
00:00:26
Speaker
A life worth celebrating and savoring. Please welcome your hosts, Brian Dewhurst and Philip Ramsey. Hello and welcome everybody to another episode of the UncomiLife Project, where I am your host, Philip Ramsey. And I am Brian Dewhurst. And today we are talking to you as just two friends hanging out because it's a duo cast, Brian Dewhurst and Philip Ramsey.
00:00:51
Speaker
We got a fun one today, and it is just a strategy. We do this from time to time. Tips, tricks, and hints for you to live your own uncommon life.
Understanding LIRP and Uncommon Banking
00:01:00
Speaker
And today we are talking about a lerp. Lerp. Sounds like you threw up in your mouth.
00:01:08
Speaker
It is a lerp. It is a life insurance retirement plan. What in the world is it? Why would you have it? And the ins and outs of it, hopefully this gives you some ideas of quirky ways that you can live your own uncommon life or if you have a business already, it could be a fun bolt on. We're gonna try to go the ins and outs of this. I think we're really good people to talk through this. So, where do we start? What is a lerp? Lerp.
00:01:35
Speaker
We've always wanted a noise maker on the show and now I feel like we get to get to do it. If you've been listening to the show, you know that we've covered, we kind of call it uncommon banking and trying to show people how they can borrow against cash value life insurance to do things now, like, you know, buy off their cars or credit cards or invest in a real estate property or start a business. And the money still compounds and, you know, focusing kind of on what you can do with life insurance now.
00:02:03
Speaker
This strategy is really the back end to that. We kind of cover it when we meet with people, but the industry calls it a lerp. So we kind of just felt like, let's identify with the lerp. And I feel like we're going to see how many times we can say a lerp in this show. But
00:02:18
Speaker
Uh, let's talk about kind of the backend. This is the benefit of kind of uncommon banking or, you know, loading up a life insurance policy with cash value. This is the backend. This is the take retirement income part of it. When he says backend, he means the cashflow side of passive income. Yeah. Right. Big buzzword. Right. Going around. Yeah. And the taxes behind the takeout of all of that.
00:02:44
Speaker
It's cool. Okay. So yeah, and we've been doing a lot more. We've got a new tool, new software to play with to model retirement income that is kind of blowing my mind and it really does a great job of showing what account you should take money out in the sequencing of that. And, you know, when you look at all the main ways, most people are going to get income in retirement, they're all taxable. And so a lerp is kind of like a Roth IRA from a tax standpoint.
00:03:14
Speaker
with way more advantages in our opinion than potentially a Roth IRA. So we'll kind of dig into that. Right. Because when you're in retirement, I'll tell you one thing that will get you two things. Maybe, uh, I would say inflation and then taxes are something too, that people are really looking hard at and like wondering, how do we combat this now?
00:03:34
Speaker
And even when we're a little bit younger, what can we do as planning now to then combat that in the future?
Beneficiaries and Structuring of LIRP
00:03:39
Speaker
This could be a strategy that people could use, am I right? For sure. Okay, so where do we start with this? And I definitely want to identify like, who is this for? Is it just for business owners or is this, you know, working out our friend, Wells Fargo? Is this an employee run thing? Like tell me about that. Well, I think this is for lots of different people. What is a lerp?
00:04:03
Speaker
life insurance retirement plan is is basically loading up a life insurance contract cash value life uh i'm sorry cash value you can either do this a whole life contract you could do this with a you know index universal life counter you could do this with a variable universal life contract um
00:04:20
Speaker
And so you're loading up a life insurance policy, trying to build the cash value. And then in retirement, you're pulling that cash value out either via a surrender of cost basis or via policy loans. And both of those are tax-free sources of income.
00:04:39
Speaker
And so one of the real advantages, you know, life insurance gets such a bad rap, right? Just because everybody hates it. I wish it wasn't even called life insurance. I know. Like they misnamed it. They really did, but it's hard not to say anything else. But the thing that's different than what other people do is normally what people are doing is trying to buy as much death benefit as they humanly possibly can with the least amount of cash.
00:05:03
Speaker
outlay for their monthly expenses. Premium and cash, yeah. Right. And so this is different because they're structured in order to build what? Cash. Cash. And so in order to do that, they actually make the death benefit do what? We want the smallest amount of death benefit for the most amount of premium. Yeah. And so it's kind of the complete opposite design.
00:05:24
Speaker
Right. And so I think this is where I would maybe challenge the listener to think like, this is maybe a different way to look at life insurance than they've even looked at before. Or if you're a long time listener, it's a little bit like you said, the uncommon banking strategy. Yeah. So I think that's just something really quick just to
00:05:43
Speaker
take a quick look at the actual life insurance itself and say, we're structuring this way different than normal. And we really do want the cash value to grow because of the benefits you just talked about. We want the tax free, the tax benefits of the cash value. Yeah. Okay.
Philosophies and Anecdotes of LIRP
00:06:00
Speaker
When I look at it too, when you look at philosophical argument or approach to building wealth, you know, I think Dave Ramsey, not your uncle,
00:06:12
Speaker
came up with one of the best, I don't know if he came up with this, but he's a proponent of it, is buy term and invest the difference. The problem is most people don't invest the difference.
00:06:23
Speaker
And so one of our clients that's doing this strategy, I would say doing uncommon banking and, you know, looking at it as a lerp. To me, this is like the cherry on top of uncommon banking, but you could look at it in isolation of just the lerp itself. He's like, it really has forced me to put money away. I otherwise probably would have spent. Like I think when you do buy term and invest the difference, it's hard to be honest with yourself of like, no, I need to save this extra two grand a month.
00:06:54
Speaker
you know, because I'm buying term insurance. It's a very slippery slope to just spend that money, especially right now. It's valid. So it kind of, you know, the kind of the way we talk about it with people or, you know, when we, when we show this to clients or prospective clients is, think about like when you're in your high school gym and you're standing at mid court and the scoreboard's on the wall,
00:07:15
Speaker
What number would you wanna see on that scoreboard from five years from now, 10 years from now, that you could save outside of your retirement plan, outside of your company work plan? And then let's try to go after that number. Even if we come up short, you're gonna have more money than you probably would have.
00:07:34
Speaker
And then when you build that into the life insurance, you know that you're getting a bill for that amount annually, you know, and it you're, you are more inclined to put that money in there. Your, your investment brokerage account or like by term invest the difference. You don't get a brokerage bill of like, Hey, you need to save $20,000 this year.
00:07:53
Speaker
you're probably just gonna spend it. So that to me is one of the biggest advantages of the WURP is it's gonna force you to put money away. So it's for everybody. It's not just for business owners, it's for employees, okay? And then let's just talk more about, there's a lot of things that we can talk about it. So how do you use and how do you fund it?
00:08:14
Speaker
Like if you're just an employee or versus you're a business owner, it sounds like they're probably two different answers. Yeah. Obviously the more money you make, it's probably more advantageous for you because there's a limit on Roth. So, you know, the more money you make, the more taxes you're going to pay. I'm talking about like W2 income or 1099 income, self-employment income. The more money you make, the more taxes you're going to pay, which
00:08:38
Speaker
typically lends you to doing like a traditional 401k or a SEP or a simple where you're getting the tax deduction in the current year because you want to lower your taxable income. If you do Roth in that situation, you're
Tax Implications and LIRP's Flexibility
00:08:51
Speaker
paying taxes on the full boat and most business owners and most high net worth people aren't doing that, aren't biting the bullet each year to fund the Roth 401k.
00:09:02
Speaker
So then if you look at, if you make too much, you can't do Roth, or let's say even make a little bit less, and you can do Roth, you can only put 6,000 in there.
00:09:10
Speaker
if you're under 50, there's just not a lot of money. So this is really for the people that like, you know, you're making double digit monthly income, let's say 10, 15 grand or more is hitting your bank account, you know, and you're only spending eight to 12 and you could save, you know, two, three, four, five, $10,000 a month after maxing out your retirement accounts and you need to put that money somewhere. The real two alternatives or three alternatives is a brokerage account,
00:09:40
Speaker
Two is, you know, paying off debt or buying real estate that produces cash flow. A lot of people don't want to do that because of the work it requires. Right. And then three, a work is a really great place for those people to store excess, you know, cash that they don't need and a force savings kind of scenario. Right. Do you get a deduction for starting something like this? You do not. It is like a Roth IRA. You're paying the tax.
00:10:05
Speaker
on the amount, and so this I'd say is a lot of, is for the people that are maxing out their retirement plan at work, or you kind of mentioned Wells Fargo. You know, if you're sub 50 and you can put 20,500 away, you could still save, you know, this would be a great vehicle for you. So. Okay. Yeah. All right. All right. So how do you use a lerp then?
00:10:31
Speaker
The advantage of the lerp is the cash value is essentially liquid to you the whole time whereas you know obviously a Roth you can't really touch it meaningfully until you're 59 and a half. I know they have some caveats like your first time home purchase and some of that but we're kind of talking beyond that stuff. And so yeah you can take a policy loan against the cash value the entire time or the beauty of life insurance allows you to essentially dictate
00:10:57
Speaker
When you pull money out, what kind of money are you pulling out? Are you pulling out the growth? Are you pulling out your cost basis? And like I said earlier, if you pull out your cost basis or you take a policy loan, that money is non-taxable to you in the current year. So that's really how you use it. You can essentially, you know, we can set it up with the insurance company where they're sending you a monthly paycheck, like a personal pension.
00:11:19
Speaker
and you get paid every month in retirement. That's kind of the goal, or you can set it up quarterly or semi-annually or whatever, but that's the goal, is you're taking a monthly or annual income stream from this policy to facilitate a portion of your retirement income. And that portion, ideally, for most of the time, is tax-free.
00:11:40
Speaker
Right. So let's talk about funding. Do you fund it monthly, annually, quarterly? You can fund it in any of those different ways. Okay. And so, and especially if you use like an index universal life policy, you can put it in a lot more flexibly than whole life. And so it kind of just goes towards your risk tolerance of, you know, which policy
00:12:00
Speaker
you want to choose. But I definitely want to do a show after this too of talking about, you know, like with some accountants about what does a zero income tax return look like? What if your tax rate was zero? Where would the money need to come from? And I know one of the answers to that conversation is going to be life insurance.
00:12:22
Speaker
uh it's just a very flexible and tax favorable environment for money from a tax perspective so it has to be the sad part um okay who needs life insurance retirement plan which or i would like to call a lerp you knew i was gonna say it lerp lerp lerp um i you know i think it's advantageous for everybody i mean more so i'd say executives business owners are the easy answer um
00:12:50
Speaker
When you look at the millionaire next door where you hear kind of like they have six to eight streams of income, this could be one of those streams.
00:13:01
Speaker
if you have real estate income, you have social security income, maybe you have a pension income, you have 401k income, you know, you could have income off of a life insurance policy. And so the advantage of that money coming from life insurance is it's more flexible than any of those other sources because there are no required minimum distributions on life insurance. There is no, you know, like once you turn it on, you have to take it forever. Like, you know, income riders or a pension,
00:13:30
Speaker
Social Security is largely that way. You only have 12 months to make any adjustment once you file Social Security. So a lot of those forms of income, and mind you, all those I just mentioned are 100% taxable to you. So a lot of those forms of income are rigid once you turn them on and or the government's requiring you to take them like a required minimum distribution on 401Ks or qualified accounts.
00:13:53
Speaker
And so life insurance doesn't have any of that. You could take out a hundred grand one year and take out zero the next. So it's a great tool to massage, if you will, your tax return or your cashflow in retirement. Yeah. Anytime we use massage and money into a podcast, I feel like we should get like 30 points. I think we should almost like start trying to pick a word before we start the podcast and see if we can incorporate it.
00:14:21
Speaker
Okay. Let's go to, I'd love to just talk through, because like there's a couple of things we're talking about, one a 401k.
Drawbacks of LIRP and Tax-Free Income Sources
00:14:27
Speaker
So what's the difference between a lerp 401k and even like an IRA? Some people might. So like doing kind of like going through pros and cons, maybe each. I don't know if you can even do this off the top of your head. This might be a lot to ask, but. I think the big, let's go to the cons of this. Cause obviously we're doing a podcast on it and it sounds like, Oh, why wouldn't everybody do this? It sounds amazing. Yeah.
00:14:47
Speaker
So the fees and costs, obviously it's life insurance. So it's gonna come with a higher cost than directly indexing into the stock market or buying individual stocks. It's definitely more expensive than that. Two, the returns can be less than what you would typically get in the stock market because it's a life insurance product. And so it's not a direct investment vehicle. So the return to the upside might be capped.
00:15:15
Speaker
And so third is just the ongoing cost of carrying the death benefit. I kind of always use the analogy McDonald's has a cost to build a cheeseburger while a life insurance contract has a cost to carry a death benefit. So all of these things can be negative. You could even view, in my opinion, the premium as a negative. You're getting a bill, it's gotta get paid. And so some people in the way they're wired with money in their mindset, they would view that as like an expense as opposed to an asset.
00:15:44
Speaker
And, you know, that would be harder for them mentally to overcome of like, I don't want to keep paying this, you know, what's the advantage. And so I think when you look at a word specifically, like you've got to look at the backend cashflow take and the tax favorable and the liquidity and, you know, those types of things more specifically as a purpose of putting the money in.
00:16:07
Speaker
Yeah. Okay. So I know a lot of our listeners are going to ask their accountant, tell me about a lerp. And I don't know if they really want to know the answer or they just want to say lerp. So what do you think the average accountant or CPA would say when all of our listeners, which there's a lot of them, shout out to all of you walk up to their CPA and say, tell me about a lerp. What do you know about them?
00:16:32
Speaker
Yeah, I don't honestly know that many accounts would even know what that means. Two, it's been my experience, I don't want to speak for you, but with all the different accountants we've worked with, with clients, prospective clients, it doesn't seem to me that a lot of accounts and CPAs like cash value life insurance. And again, they're not all created equal, too. We don't like most of them either.
00:16:57
Speaker
It has to be designed very specifically and as part of a very cohesive plan. Comprehensive. Yeah. And so I would say it wouldn't be favorable. But then when you flip the conversation of what are the sources where I could get tax-free income in retirement,
00:17:16
Speaker
you know, the answer is very short. Roth and life insurance, and I'm sure there's maybe some other quirks out there, you know, municipal tax-free, municipal bonds, if interest rates were to go back to a more normal level, treasury bonds, there's multiple answers beyond two, but from an overall structural standpoint, Roth and life insurance are two of the main structures to generate tax-free retirement income.
00:17:43
Speaker
Okay, so you're telling our listeners that they can't use the word lerp is what I heard. No, I think that's wise. I love, here's something that I think you did pull out is sometimes I think accountants or CPAs, it helps on how you ask the question that will help you deduce what the answer is because there's a lot of preconceived notions about different things. And if you ask it in like, and you address that,
00:18:09
Speaker
they might have a different answer than if you're just, you know, they hear life insurance like shut it down or whatever. So what are some quirky things I think that they can look at and like who can get them into something like this? And how do they even go about learning more information about it, things like that. And what are some quirks if they do ask some random advisor, not us, which seems really weird.
00:18:33
Speaker
They're listening to our podcast, but if they are, what are the some things like pitfalls that they could maybe see out of a proposal? So I think you'd want to be very weary of a proposal that didn't have a significant amount of cash upfront. So like if you're going to put in whatever.
00:18:51
Speaker
$30,000, $50,000 a year for 10 years. And let's just, I just like round numbers, so I'm not trying to make the number big, but let's just say you're gonna put $50,000 in a year premium. If your cash value is not above, I would say 25 to 30 in year one, I would be very hesitant to continue down that path. Or let's just get a different opinion too. Yeah, so you definitely want some significant upfront cash value to this.
00:19:20
Speaker
Because if you remember, we are structuring these for a high cash value so it can grow quickly. And if something goes wrong with the plan and you need access to that money, you don't want that to be a goose egg for the first five years. Amen to that. So that would be kind of one thing to look for. Two, I think in terms of like who is this for or why would you use this, maybe take a step backwards, but
00:19:43
Speaker
You can't really meaningfully touch your 401k money before you're 59 and a half, even Roth IRA money.
LIRP as a Strategic Financial Tool
00:19:50
Speaker
If you really want to retire sub 59 and a half or have time freedom, maybe you're still doing stuff and generating income, but you want more time freedom.
00:20:00
Speaker
you know, this is an asset class that you can tap for income and liquidity prior to 59 and a half without penalty. And so it's a very flexible asset when you look at the stages and phases of life and putting together a plan. When there's a lot of cash value in it. Right, yeah.
00:20:19
Speaker
So, I kind of forgot your other point. Oh, okay, so who can get something like this for them? Yeah, I think any licensed life insurance agent would be able to help them in theory. And I think another thing that I would say is a pitfall is having an increasing death benefit.
00:20:38
Speaker
that seems like your death benefit should always be a little higher than your cash value would ever be, something to watch out for. Like if your cash value ends up being the death benefit and it's like pretty early on in the contract. Now later down the road, when you turn into be like 80, they might be the similar, but even early on, you probably wanna make sure that that death benefit is increasing, not staying the same. That's some other pitfall that I think I've seen in the past.
00:21:08
Speaker
Yep. Okay, I'm trying to think what else. I think we covered it.
00:21:12
Speaker
Okay, so anybody can get up to it. So this is where I think it's interesting. It's the life insurance retirement plans and the retirement plans makes me think of employee, like a business owner or somebody that has access to something for a retirement plan. Cause that's normally who I guess applies retirement plans the most, right? But this isn't really what that is. You don't have to have a business structure. Yeah, it's for anybody. It's a liquid savings account.
00:21:39
Speaker
you can access it month one, you could access it 30 years from now, it's just like a forced savings account. And then like I said earlier, you can do it with whole life, you can do it with index universal life, there's different vehicles of life insurance that you can do based on your risk tolerance. And that I think is maybe a separate show. But
00:22:00
Speaker
Right. So let's do last thing. And we've kind of danced around it, but just patient type or, or person that this is ideal for. And I think it's interesting to know that, you know, it could work for somebody, you know, not this, but in an ideal world, I think you've already painted it, but I think let's just reintroduce that kind of like, Oh, this is me. Yeah. Maybe I should definitely entrepreneurs, business owners. Um,
00:22:24
Speaker
I think especially too, if you have a younger family, like dual income, you're like 25 to 35, like really young and maybe you don't want to max out your 401k yet because you're maybe trying to upgrade the house that you're in or you've got private school for your kids.
00:22:43
Speaker
And so you have more like after tax expenses. And so you're trying to, you know, still build the lifestyle you want. You're not in a place to, to overfund. I think that's interesting. Or you are maxing out your retirement plan. You still have excess cashflow to save and you want it to be tax protected because if you're, if you're making that kind of money, you don't want to make after tax
00:23:07
Speaker
income off of dividends and that type of stuff or capital gains exposure where you're buying and selling stocks, it's just gonna amplify your tax problem. This is a way to shelter you from that but still get upside exposure to the stock market.
00:23:21
Speaker
without triggering excess taxes. And then people that want multiple uses on their money. I would say people that want to do, we have a lot of people that use this in concert with buying single family homes, duplexes, rental properties. It's a great place to get down payments for multiple properties.
00:23:43
Speaker
because you're forced to sit on excess amounts of cash if you own real estate. And this is maybe a better long-term storage vehicle than just leaving it in the bank. Yeah, I also think like somebody who's have a great cashflow. So let's start there. So 10 to $15,000 to $25,000 to $40,000 a month that's coming in and they've already maxed out their 401k.
00:24:09
Speaker
this is something that seems like it could be a really good fit for those people totally because ideally you just want cash flow that you want to try to do something with uh and then we want to put it into some environment that will grow tax free but we don't want the burden of the Roth
00:24:24
Speaker
And you can do a Roth conversion. You can totally do that, but at some point you need access to be putting away money for retirement. But also, I love it that you have access to it before retirement if something were to happen or you have an amazing opportunity. You can pull that cash flow or cash value out. I just want to compare it to the Roth really quick because I think this is super important.
00:24:46
Speaker
In a Roth, let's say best case, you can contribute to a Roth in a 401k. If you're under 50, the amount you can put in max is $20,500 a year. If you're over 50, it's like 26,500 or something like that. Maybe it's just, no, it's 27,000, I think for 2022.
00:25:03
Speaker
So that's a big number for people, but there's a lot of people making way more than that. Yes, a lot of people. And if you don't, if you're not over the income requirement to do Roth, and you're doing Roth outside of your retirement plan, it's only 6,000. And if you're over 50, it's only 7,000. Well, if you have an extra 50 to 100,000 a year in cashflow, you
00:25:25
Speaker
It's so tiny, it doesn't even move the needle. And so we can structure these premiums on life insurance, and again, structuring them with pretty high cash value up front, where your premiums could be 50 to 100,000, but again, that's showing up in cash value, so it's not gone from your economic engine. And so we can put that money away, so it's like the question is, if you could put 50 to $100,000 a year into a Roth,
00:25:52
Speaker
Would you do it? Would you do it? And I think there's a lot of people out there that would, they just have never been shown this. And then if you put that money into a brokerage account, are you gonna truly save as much as you probably could? I don't know. And then B, let's say you are, and you wanna buy and sell stocks or you're doing any type of moving inside that portfolio, you're probably gonna trigger capital gains.
00:26:14
Speaker
which is going to move the needle on your tax liability. So this gives you the upside potentially to the stock market, depending on the vehicle that you use of insurance and shelters that money from tax. I do think though, it's probably not for everybody, right? Like this is definitely not for everybody. So if you hear like, Oh, it's for me and you know, maybe you have to understand it and you have to appreciate it. And I think it has, like you always do a great job of saying like, it's all, everything's about risk tolerance.
00:26:42
Speaker
And if this fits your risk tolerance and you understand it, it can be a great vehicle. If you don't understand or you don't like it, there's gonna be friction there and you should probably just not do it. We heard a guy today actually, he said, if you're thinking about, if a decision is murky, that means no. If there's a spectrum of the decision is like, yes,
00:27:04
Speaker
maybe and no, maybe and no go together. Yeah. I love that. So anyways. Okay. Well, I think that's at least gives you a little bit of exposure to a LERP life insurance retirement plan. Thanks for your time. Thanks for listening. Thank you. You've been listening to Uncommon Life Project. I've been your host, Philip Ramsey. And I'm Brian Dewhurst. Until next time, have a great day and go be uncommon. Bye.
00:27:29
Speaker
That's all for this episode of The Uncommon Life Project, brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.