What’s a LIRP and Why You Need One

A LIRP is a Life Insurance Retirement Plan. I suspect I just lost about half my readers but for those of you who are still reading, stay with me. I promise you will be glad you did!

In December of 2023, it was reported that 53% of Americans have less than $10,000 saved for retirement. Not far behind them is the 15% of Americans who have between $10,001 and $50,000. Said another way, 68% of Americans have less than $50,000 saved or retirement. Houston, we have a problem. Suze Orman once said, “We can make a difference when we think differently”. Now, I don’t agree with the majority of what she says but this is something I can get behind! If we think differently, maybe more people would be better prepared for retirement?! By the way, if you’re a note-taker go ahead and grab pen and paper. You are about to receive a secret family recipe. C’mon. You know what I’m talking about. Your grandmother makes THE BEST pasta sauce known to man. You’ve tried to replicate it but you just can’t seem to get it right. You’re missing that secret ingredient that only grandma knows. Lean in. I am about to reveal the secret ingredient that is going to transform your retirement savings plan!

 The Financial Services Industry has been trying to get it right for years but to no avail. The Insurance Industry, on the other hand, has in my opinion, struck oil. What if you could receive income without having to actually withdraw it from your retirement account? What? I know that sounds kind of crazy, doesn’t it?  But I bet 99% of you have done something just like this before! I know. I know. Do you think I have gone off the deep end? Now is the time to think differently my friend. Our country is in no way shape or form adequately preparing for retirement. You must make a change and make it now!

For those of you who are still reading, thank you for your vote of confidence. So, what in the world am I rambling on about? Have you ever gone to a bank and walked out with money that didn’t belong to you? No, I’m not asking if you’ve ever robbed a bank! I’m asking if you have ever received a loan from a bank. Ah, of course, you have! But what does that have to do with making my retirement income last? I’ll get to that shortly. Have you ever tried to get a loan without collateral? Oh, it can be done but you must jump through several extra hoops to walk out of a bank with their money and only a promise to repay them. I think we can all agree that it is much easier to get a loan when you have assets to pledge as collateral.  

Let’s look at this another way. Let’s say you have a child ready to go to college. They didn’t receive a scholarship and don’t qualify for financial aid. You are now faced with either paying cash or getting a loan. Cash is not an option, but you have accumulated quite a bit of equity in your home. You could sell your home and downsize, right? Yes, you could but is that really the best thing for you and your family at this point? The other option is to keep your home and borrow against your equity. So, you pledge your home as collateral and the bank provides the $50,000 to pay for college. This is where it gets interesting so stay with me. Let’s say your home appraised for $250,000 when you received the loan 4 years ago. The real estate market has appreciated quite nicely over the last 4 years. Your home is now valued at $300,000 and someone wants to buy it. Boy, that is exciting! Somebody is about to make $50,000 the question is who? Well now that seems like a silly question, doesn’t it? I mean you do own the home and the bank’s mortgage is only $50,000. You could sell your house right now, pay off the bank, and have $250,000 in your pocket which is what you had 4 years ago. STOP. Think about that. The growth of the real estate market just funded your child’s education – yah! Does the bank care if you sell or stay? No, they don’t. As long as the value of your home supports the balance on the loan, they know the loan will get repaid when the property eventually sells because they have the first lien.  

What just happened here? The value of your asset/collateral is appreciated at a higher rate than the rate on your loan. That my friend is a classic example of arbitrage. Arbitrage is the practice of taking advantage of a price difference between two or more markets to capitalize on the imbalance. If you would have sold your home for $250,000, downsized, and paid $50,000 cash for college what would you have? An asset valued at $200,000. By using the bank’s “cheaper” money you kept your home, enjoyed a nice market value increase, and now have an asset valued at net $250,000 ($300,000 less the $50,000 banknote) and your child’s college education is paid in full. You, my friend, used positive arbitrage to your advantage and I bet you had never even heard the term until you read this post!  So how do you feel about this fancy-smancy term called arbitrage? Does it make you feel empowered?  Well, it should because it is about to change your life!

What if you could pledge your retirement assets as collateral and borrow your retirement income every year? Yeah, I know…I’m dreaming. Think about it though. Instead of withdrawing part of your principal each year, ALL your money would continue to benefit from interest credits. Let’s look at an example and apply this “new” way of thinking. You have saved $750,000; it is growing at a rate of 4% and you want a $50,000/year income.

Year Principal Withdrawal Subtotal 4% Interest Total
1 750,000 50,000 700,000 28,000 728,00
2 728,000 50,000 678,000 27,120 705,120
3 705,120 50,000 655,120 26,205 681,325
4 681,325 50,000 631,325 25,253 656,578


Compared to the “new” way of thinking:

Year Principal 4% Interest Total Loan Net
1 750,000 30,000 780,000 50,000 730,000
2 780,000 31,200 8111,200 100,000 711,200
3 811,200 32,448 843,648 150,000 693,648
4 843,648 33,746 877,394 200,000 677,394

The gain over four years is $20,816.  We are moving in the right direction!!  

Guess what? I’m not dreaming. This is EXACTLY what the Insurance Industry figured out and the Financial Services Industry doesn’t want you to know! Now for all you naysayers out there, yes “interest” accrues on the outstanding loan balance.  Let’s go ahead and address that right now.  What you think is a negative is actually quite positive!

Earlier when you got a loan from the bank to pay for your child’s college education, did you report that as income on your tax return the following year? That’s absurd! Of course, you didn’t! You don’t report loan proceeds as income. Why not? Simple. Loans must be repaid. Hmmm… this is starting to get very interesting. Do you report income from retirement accounts on your tax return? Except for income from a Roth IRA, you bet you do! Whoa…wait a minute. Have we discovered a loophole? Am I saying that if people…YOU…use an Indexed Universal Life Insurance Policy as your vehicle of choice to fund your retirement and then “borrow” your income instead of actually withdrawing it, you can avoid paying income tax? Oh my…. I think that IS what I am saying!  

This is a whole new ballgame people! We must reevaluate the numbers. Assuming your effective income tax rate is 20%, when you withdraw $50,000 from your retirement assets you only get to keep $40,000. Sorry, not my rule. However, if you wanted to receive $40,000 from your Indexed Universal Life policy you would only have to borrow $40,000 because it’s a loan and you get to keep it all.

Year Principal 4% Interest Total Loan Net
1 750,000 30,000 780,000 40,000 740,000
2 780,000 31,200 811,200 80,000 731,200
3 811,200 32,448 843,648 120,000 723,648
4 843,648 33,746 877,394 160,000 717,394

After 4 years of borrowing $50,000, our net account value from above was $677,394.  We now have $40,000 MORE because we borrowed less. Do you realize that in this example pledging your retirement assets as collateral and borrowing your retirement income for 4 years just added another year of life to this asset? Are you starting to see how when you think differently the risk of running out of money during retirement is reduced? Is this exciting or WHAT?!!!!! Oh, and yes. I will absolutely pay 4-5% interest on a loan to avoid paying 20% income tax or more!

Ok, if this is so easy why isn’t everybody doing it? Well for starters, the Financial Services Industry doesn’t want you to know it is even an option! Beyond that, you must think differently. Let’s face it you have heard your entire life to max out your 401(k), grab the “free money” (i.e. company match), and pay lower taxes in retirement because you will make less money then.  Hopefully, by now, you realize these are ALL lies to encourage you to play the Retirement Game hosted by none other than Uncle Sam himself! 

Let it be known, that arbitrage is not foolproof. You can experience negative arbitrage if you are not paying attention. What is negative arbitrage? This is when it actually costs you more to borrow money than your collateral is earning; you are losing money, not making money.  There are ways to mitigate the risk of negative arbitrage. I highly recommend your work with a seasoned Life Insurance Specialist to both design and manage your LIRP.

Now before we leave this subject, I need to address the naysayers one more time.  It’s likely they will agree that using an Indexed Universal Life policy as the vehicle to fund your retirement can safely produce tax-free income but they will be quick to add, “And once the government figures out what is going on they will close that loophole faster than you can say sha-zam!”  Well, the government might want to close this loophole but they can’t.  How can I be so sure?  An Indexed Universal Life Policy is a contract.  Per the constitution of the United States, contracts cannot be changed once issued. 401(k)s and IRAs, however, are laws written directly from the tax code. Last I checked, laws can and do change on a regular basis. 

So there you have it….arbitrage…the secret ingredient that extends the life of your retirement account! The crazy thing is, except for a $50,000 max loan from your 401(k), you cannot borrow from any retirement account available today. You can, however, borrow up to 90% of the cash value in your Life Insurance Retirement Plan and the IRS can’t do a thing about it!

For more information on Indexed Universal Life Insurance, go to jondaknows.com/resources and select “types of life insurance”.