💰 How high earners turn life insurance into a cash machine

☕ Good morning!

You might have never thought life insurance and retirement planning combined could be exciting, but that's about to change. 

Imagine a financial tool that not only secures your family's future but also boosts your retirement savings—welcome to the two-punch combo of Life Insurance Retirement Plans (LIRPs).

LIRPs are the Swiss Army knife of finance. They give you the freedom to save for retirement without limits, borrow tax-free, and provide a hefty death benefit for your loved ones. 

It’s the ultimate blend of life insurance and retirement perks, all wrapped into one neat package.

Let’s dive into why LIRPs should be on your radar.

The Skinny: LIRPs 101

LIRPs are post-tax as you’re paying for insurance premiums with after-tax money. The cash balance portion of your premiums is always accessible, but the growth would be taxed at ordinary tax rates if withdrawn.

However, the primary LIRP strategy is to take out loans against the total value of your LIRP cash balance whenever you need it.

Critically, policy loans aren’t considered income. This means you can take out substantial loans from your LIRP without tax penalties, letting you enjoy retirement comfortably. 

You can repay these loans using traditional retirement funds, keeping your death benefit intact for your beneficiaries, or letting the death benefit cover the loan repayment after your passing.

🏆 Key Advantages:

💰Withdrawals structured as loans are tax-free.

🌲Provides a tax-free lump sum to your beneficiaries as a death benefit.

📈 Offers growth and often a guaranteed interest rate.

⚡Includes accelerated benefit riders for cases like terminal illness.

😵‍💫 Main Drawbacks:

💬 Unlike traditional retirement accounts, LIRP contributions aren’t tax-deductible.

💬 Costs are higher than just contributing to a traditional retirement account due to insurance benefits.

💬 May offer lower interest rates compared to other investments if choosing a fixed rate.

💬 Fewer investment choices compared to other retirement savings vehicles.

Despite these drawbacks, LIRPs are a unique option worth considering for maximizing retirement benefits and legacy. 

Consulting with a financial planner can help determine if LIRPs fit your retirement strategy.

So, how do LIRPs compare (or enhance) your traditional retirement accounts?

We see some compelling benefits if we view LIRPs through the lens of traditional retirement accounts. 

Contribution Limits:

🚀 LIRPs: Sky's the limit. Contribute as much as you want.
💸 401(k) & IRA: Chained by limits—$23,000 for 401(k)s and $7,000 for IRAs in 2024. Over 50? Slightly higher caps, but still restrictive.

Tax-Deductibility:

❌ LIRPs: No tax breaks on premiums, but the growth is tax-deferred, and withdrawals can be tax-free if you play it right.
💸 401(k) & IRA: Contributions slash your taxable income now, but withdrawals later? They get taxed. Roth IRAs avoid this but come with strings attached.

Withdrawal Flexibility:

👐 LIRPs: No RMDs. Your money, your timing.
🔒 Traditional Accounts: RMDs at 72. Like it or not, you’ve got to withdraw.

😇 LIRPs also give you a death benefit for your beneficiaries, adding an extra layer of security.

🛠️ How to Structure a LIRP for Maximum Benefit

Avoid direct withdrawals as a first move; they can exceed the premiums you've paid into the policy, causing tax issues. 

Instead, opt for policy loans. 

These loans give you a nice cash boost without tax implications. 

Many policyholders plan to keep these loans outstanding until death, allowing the death benefit to cover the loan balance and leaving the remainder tax-free to your beneficiaries.

👻But beware: if your loan balance grows too high compared to your policy’s cash value, the policy could lapse. This turns the outstanding loan into taxable income, leading to a hefty tax bill and potentially bumping you into a higher tax bracket. 

A lapse means the IRS sees your outstanding loan as previously tax-deferred income, now taxable. The taxable amount is the difference between your loan balance and what you've paid in premiums, potentially landing you a substantial tax bill.

 Keep an eye on these factors to maintain your LIRP’s benefits and work with a financial planner to monitor your loan balance and cash value ratio.

💼 Making Cents of LIRPs

A solid LIRP strategy can be your financial ace in the hole– a tax-free surge of cash supplementing your retirement accounts whenever you need it, and if you don’t, you can live life knowing that your beneficiaries will be taken care of with a sizeable (and non-taxable) death benefit. 

If you take away anything from this week’s newsletter, LIRPs let you borrow against your policy without it being considered income. 

If your LIRP cash balance is robust, you can glide through retirement, knowing your loan repayment will come from your death benefit.

Or, you could repay the interest using your traditional retirement funds and keep the death benefit intact for your beneficiaries.

The sweet perks also include tax-free distributions, a guaranteed death benefit, growth potential, and flexibility with accelerated benefit riders. 

Sure, they have downsides, like non-deductible contributions and potentially lower interest rates, but the pros often outweigh the cons. That’s why LIRPs fit best with an active retirement planning strategy with traditional accounts– not the end-all-be-all of your nest egg planning.

Until next week! 

Dan from Tailored Cents

P.S. Follow me on LinkedIn for more tax gems to save you money.