What is an LIRP and Why Should Clients Use Them?

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One of the most important ways a financial planner helps clients is by minimizing the taxation on their income. Tax-deferred qualified plans receive much of the focus during the accumulation years, but what about reducing taxes in retirement?

Chances are, your clients are in a lower marginal tax bracket now than they will be in the future. Two factors suggest that tax rates are likely to increase over time: current tax rates are set to expire in 2026 and, absent congressional action, return to pre-2018 levels; and future financial obligations of the U.S. government to entitlement programs may necessitate higher rates. To account for this probability, the key is to find additional future tax-free income for your clients.

You may be thinking, “I know where this is headed…annuities.” Over the last 10 years, I’ve had countless discussions with advisors about tax-deferred annuities. I occasionally hear comments like “My client already has too many tax-deferred assets,” or “Ordinary income tax rates will be higher when my clients take withdrawals than they are now.” These statements can be true, but the questions to ask are, “Does my client have enough tax-free income? How do I secure it?”

Using life insurance, not annuities, for tax free income

A life insurance retirement plan (LIRP) can be ideal for clients who have too much income to contribute to a Roth IRA (> $189,000, married). Because LIRPs have no contribution limits, if they are bought with a large enough death benefit (minimum non-MEC), they are very effective for generating tax-free income. Fees will be dependent on client age and underwriting, but with no premium load on commission-free products, more of the client assets go to work within the policy.

The strategy is to purchase as little a death benefit as possible to keep the client’s cost of insurance low (while still clearing the non-MEC death benefit threshold.) A non-commissioned life insurance policy is an ideal vehicle for this due to the cash accumulation potential.