We previously mentioned the option of using life insurance retirement plans (LIRP) such as Index Universal policies. Although it is indeed an option, is it necessarily the best option for you? Here’s a look at life insurance retirement plan pros and cons, and factors you should consider before purchasing a policy.
Life Insurance Retirement Plan Pros
A combined life insurance and retirement savings plan certainly does seem appealing. Earnings on the funds accumulate tax free. You can also borrow against the accumulated value without incurring the same penalty that may apply to other retirement savings. Additionally, there’s the option not to pay back the borrowed funds; it would simply be deducted (with interest) from your death benefit payout. These are all great features and make this type of life insurance fairly popular.
Cons of Retirement Insurance Plans
Now let’s take a look at some of the disadvantages of this program.
Hidden Fees: Most plans have hefty fees built into the policy.
Low Initial Surrender Values: During the first few years, you can not access the full accumulated value. In fact, you lose most or all of that value if you cancel the account (either by choice or non-payment) within the first ~5 years.
Long-term Financial Commitment: Most policies require large monthly or annual contributions. Unlike other investment options, you cannot simply stop contributing or dramatically reduce your payments. Failure to pay can essentially cancel the life insurance policy.
Given these downsides, it is important to consider other investment options. If you have a 401(k) plan, perhaps you should max out annual tax-free contributions ($19,000/yr) on that first. You may also speak to a financial advisor about index investment funds. Compare the added cost of a LIRP to a less costly life insurance option, such as term life insurance. Calculate the difference and evaluate how you might invest those funds and what the returns and tax liabilities might look like. In some cases, LIRP might be a great solution with tax savings benefits. In other cases, you might earn and save a lot more by going a different investment route.
Now that you know some of the life insurance retirement plan pros and cons, you are one step closer to making an educated decision. Contact your life insurance agent for quotes and your financial advisor for guidance. The information above is purely informational and should not be construed as financial or legal advice.