What's a LIRP?

LIRP stands for "Life Insurance Retirement Plan"

The acronym LIRP, or Life Insurance Retirement Plan, isn't a formal or technical term. Additionally, there is no particular product officially called LIRP. Instead, LIRP is the informal name given to the concept of using a permanent life insurance policy as an eventual source of cash flow in retirement from borrowing against the policy's cash value. While any form of permanent life insurance could technically work as a LIRP, it's most commonly Indexed Universal Life, or IUL, policies that are used

The gist and goal of a LIRP is to have a permanent life insurance policy's cash value build up as much as possible over time so it can eventually be borrowed against in retirement (hence the name Life Insurance Retirement Plan). Assuming the policy stays in force all the while, the loans do not have to be repaid while the policy's insured is alive. Instead, when the insured eventually dies, the outstanding loans will then be paid off by the insurance company keeping some of the policy's death benefit. The remaining amount of death benefit will be paid out to the policy's beneficiary(ies). For example, if the policy's stated death benefit is $500,000 and there are $400,000 of loans outstanding when the insured dies, the beneficiary(ies) will receive $100,000 (not $500,000) of payout upon the insured's death

It's important to know that the intention of using a permanent life insurance policy as a source of retirement cash flow is predicated on the assumption that loans - not outright distributions or surrenders - are taken against the cash value. Like any form of debt, loans against a life insurance policy are not considered taxable income (because they're not actually income in the eyes of the IRS; they're just borrowings). It's this concept that belies claims that IULs used as LIRPs can create "tax-free retirement income." However, if actual distributions are ever taken out of the policy's cash value, there may then be tax on at least some of that distribution. Specifically, if a policyholder distributes more than the total amount of premiums paid into the policy, the amount of distribution above and beyond the cumulative premium payments is taxed as ordinary income in the year of the distribution. For example, assume you paid $5k into an IUL every year for 10 years, for total premium payments of $50k. 10 years after that, your policy's cash value is $110k. If you were to take out that $110k, you would have to pay ordinary income tax on $60k of it ($50k would be treated as a tax-free return of your initial contributions into the policy, and $60k would be treated as fully-taxable interest)

One of the main benefits of borrowing against cash value life insurance is that the money borrowed isn't actually taken out of the cash value and therefore the full amount of cash value will continue to earn interest. For example, assume your policy's cash value is $100k and you take a $40k loan against it. You will still have the full $100k earning interest crediting (as opposed to only having $60k earning interest...$100k original cash value minus $40k loan). Separately, you'll have to pay interest to the insurance company on the $40k loan. And if you choose to not pay additional money into the policy to cover the cost of the loan interest, the loan interest will be deducted from the policy's cash value. But nonetheless, the amount of loan doesn't directly reduce the amount of cash value that stays in the policy and continues to earn interest crediting

This leads to an important consideration when taking loans against cash value life insurance; the interest paid on the loan could potentially be higher than the interest credited to the cash value. For example, assume the $40k loan mentioned above is charged 5% annual interest by the insurance. The total interest expense for a year would be $40k * 5% = $2k. Even though the full $100k of cash value is still able to earn interest, it's possible the interest credited for a year could be less than the amount of interest expense on the loan. In a worst case scenario, the interested credited could be zero yet, in this example, there would still be $2k of loan interest that needs to be paid. If you choose to use your policy's cash value to pay the interest instead of separately paying the interest with additional funds, your cash value will decrease by $2k. Furthermore, there will still be the policy's cost of insurance and other potential fees that need to be paid and will come out of the cash value, further reducing it. With this in mind, it's important to remember that IULs can potentially lose money, even though the interest credited to the cash value will never be less than zero. As such, contrary to the claims by some who sell IULs/LIRPs, they are NOT "can't lose money assets"

There is much more devil in the details of properly structuring a LIRP, such as ensuring it has an "overloan protection" rider to prevent the policy from having too much loan against it, catastrophically collapsing and potentially leaving the policyholder with a large taxable event from being forced to surrender the policy. Additionally, many IULs used as LIRPs will have some sort of long-term care or chronic illness rider added to them. Also, it's imperative to know that LIRPs are intended to be a lifetime commitment as it takes years - often decades - for the potential value of them to fully manifest

While the above summary provides only a high-level introduction of LIRPs, it should hopefully at least provide a base level of knowledge from which you can further learn and understand the intricacies and complexities of using IULs as a retirement cash flow tool

To learn more about LIRPs, check out the LIRP episode of my podcast, Retirement Planning Education, below:

What's a LIRP?

LIRP stands for "Life Insurance Retirement Plan"

Further Reading