Life Insurance Retirement Plan (LIRP) - scam?

A reasonably financially savvy co-worker has been suggesting that I look into these things called Life Insurance Retirement Plans, which appear to be some sort of scheme where you over-pay on a life insurance policy - but the life insurance policy is really an investment, which a broker directs for you - then at some point you start taking out “loans” against the policy which you have no intention of repaying, and these “loans” in effect are tax-free, and so you get tax-free earnings as well as keeping the base value of the life insurance policy…yeah.

Since I’m likely to soon be unemployed and lose my work-provided life insurance, I’d like to get some “private” life insurance anyhow. This sounds like something that could be a little bit better, provided I can overpay. It sounds like a “too good to be true” thing, but my co-worker says it’s sort of analogous to a reverse mortgage on your life insurance. Do any financial Dopers have comments on the plans in general, or things to watch out for?

IANAInsurance Agent, but isn’t that just a whole life insurance policy? They have real cash value that you can pay on and take loans from.

I don’t know - I know very little about life insurance and things like this, which is why I was hoping someone here might know.

I don’t know this product; but I am deeply, deeply suspicious of life insurance/investment mixed products.

From working at a (Canadian) life insurance company for a couple of summers in uni I know that agents make a significantly higher commission on these kinds of products; so I can only assume that they’re great for the insurance company.

my guess is there are higher fees/expenses to those investments that are not immediately visible to people. A good approach is examining whether or not one can purchase the exact same investment holdings outside of a LIRP with lower expense ratios.

So do you think the average life insurance broker is particularly great at managing investments? But that rather than going full time into the stock market, he continues to sell life insurance? Riiiight!


I know this is IMHO, but generally speaking it is best to keep your life insurance and financial investments separate. The vast majority of people are much better off with simple “term” life insurance than whole life, universal life, or whatever they call it nowadays.

The usual disclaimers apply. I am a licensed insurance agent, however I am not licensed in your state and I am not your insurance agent.

They’re not a scam, exactly, but they’re not entirely risk-free.

It sounds like your friend is describing a strategy using a life insurance product called a variable universal life (VUL) policy. These policies involve one or more separate investment accounts. When the value of these accounts go up, the cash value of the policy goes up. You can pay additional money into the investment accounts over and above the premiums, which is what your co-worker does, and (theoretically) gain a higher cash value over your lifetime. Distributions from these policies are tax-free.

There are several drawbacks to this.

First, you must be able to obtain life insurance, and if you are older or have health problems, that can raise premiums dramatically. The premiums are generally not cheap to start with.

Second, overfunding a variable universal life policy can push it into what is called a “modified endowment contract” (MEC). These have different tax treatment than a regular VUL; distributions from the policy during the lifetime of the insured are taxable in a MEC. The death benefit from the life insurance is still untaxable, however. And it’s the IRS that determines whether a life insurance policy is really a MEC.

Third, the investment accounts in VUL policies are still investment vehicles that rely on the markets to make money. As with most other investments, they go down if the market does. I saw several clients in the fall of 2008 whose VUL values went away. Not just “down” but “gone”.

My advice is to see a qualified financial professional in your state who can sit down with you and give you an honest assessment based on your specific situation.

Thank you, MsRobyn, that’s the sort of info I was looking for. Googling on what my co-worker said wasn’t turning up much for me that matched, but I remember now he said “VUL.” Now I can try to do some more research before I bother my broker about it.

I’m probably too hard to insure to take advantage of it, given some additional thought.

I have been discussing this kind of plan with my financial advisor for a few months. I have gotten the same pitch and I believe it is true as far as it goes. The long-term idea is that because there is a death benefit, you can spend down your other investments while your are still alive secure in the knowledge that when you pass, there will be money available for your spouse or to pay off any loans you took out while still alive. It’s primary advantage, as far as I can tell, is it provides some protection from outliving your savings. Basically, it works if you plan to hold it long-term (15 yrs or more). It works even better if don’t have the self-control to save outside of paying the (insurance) bills.
It is insurance and gets favorable tax treatment. But it is not cheap insurance. Owning a term life insurance plan is still a good thing to do. In my case if I invest the $ I would otherwise have spent on the whole life insurance, I will be far ahead for at least the first 5 years or so. The flip side is that if my circumstances change in 5 years and this plan begins to make sense for me, I will be 5 years behind in getting the benefits-it takes a long time to build up the cash-value that you can use to borrow from. I haven’t decided what to do yet.

If you’re likely to be losing your job soon, you don’t want to even think about a whole life or universal life policy. The premiums are several times what a term life insurance policy will cost. In my case, I got a $750,000 30-year term policy for $600/year. A VUL policy with a face amount of $250,000 was over $5,000/year. I was a healthy 34-year-old non-smoker who was eligible for the best rates at the time. Agents will tell you that the policy is building cash value so that $5,000 is actually an investment, but the illustration of my policy showed that it would take at least 10 years for the cash value to reach $50,000. For the first ten years the policy would be worth less than the premiums I had paid.

But before you buy even a term policy, you should evaluate whether you need life insurance at all. Do you have dependents? Does someone besides you rely on your income? If not, you probably don’t need any life insurance policy. If someone does rely on your income, you probably can’t afford to replace that income using a whole life or VUL policy.

I have no dependents, debts, or financial obligations, but they were pitching it to me as more of a great tax-sheltering investment. From other research I’ve now done it sounds like it might not be a good thing.

They do, but whole life is VASTLY more expensive than term life.

As an example, I’ve got a whole life policy. I got this policy when my company was sold to another company, and the new company’s group life insurance refused me a policy initially for medical reasons. The old company’s “conversion privilege” was only to convert to a whole life individual policy, not a term life policy. As I was worried about getting any insurance at that point, I took the most whole life insurance I could see affording.

Well, when I did get into the new job’s group policy a year and a half later, its premiums (for me, for eight times the whole life’s value) per month are about half the whole life’s premiums.

Now, those premiums will rise, and of course when I turn 70 the whole group policy goes “poof” - whereas the whole life policy is forever.

Re the retirement thing: Yes, one could take a loan against a whole-life policy. Depending on the terms of the policy, you might or might not need to pay interest (typically at a fairly low rate). If you don’t keep paying your premiums, however, the life insurance (and any untapped value) go away.

Also - whole life’s value doesn’t necessarily increase all that much over time so it may not be much of a nest egg.

I saw several threads on whole life vs. term life on a different board - the general consensus in Canada was that the whole life was a rip-off. You could combine term life with normal investments or an IRA (RRSP in Canada) or whatever until age 65 and come out much further ahead and have significantly more choices for your investments. In my case, I too out the value after 6 years when I went back to school, and it was worth about half what I put in.

As others pint out - it’s an excellent choice for the guy getting a commision to sell it to you.

Besides - what do you need insurance for at 75 or 85? By the time term life gets expensive, at 65 or older, you should have the house paid off and a decent nest egg (plus the value of the house!). So you kick the bucket at 85 and the kids get $500,000, if you haven’t used it all up in retirement payout, what good is it? If you’re 85, your kids are 55. If they haven’t gotten their shit together financially by then, even an extra $500,000 won’t help. If they spend their whole life (sorry) waiting for this ship to come in, instead of making their own investment decisions, then you raised them wrong.

You need the (term) life insurance when you’re 30 or 45, the kids are growing up, there’s college bills to pay soon, and the house mortgage needs to be paid off if you get hit by a beer truck while crossing the street. At 65, you better be set instead of gambling that you’ll die.

I know of only one set of winners in Whole Life. Most Canadian whole life companies were mutual companies, meaning each policy holder owned a share of the company. The managers saw a gold mine in taking the company public, so people who had shares/policies when it went public suddenly found their shares worth a fortune. Why? Because the assets and the fund were sufficiently undervalues and underinvested, and the fund had still grown so much faster than obligations, that there was a huge amount of money for everyone when it was revalued at the real market rate.

An acquaintance of mine found himself with tens of thousands in cash payout when he was in his late 20’s, thanks to a policy his parents bought him on high school graduation. He had a good time for a year or two - then it was all gone. Good investment!

My dad was a lifelong insurance agent and he started up a life insurance plan for me when I was a kid as a supplement to Social Security and any other plans I chose to take part in. Once I graduated college, they transferred it into my name and now I pay the $300 a year.

I don’t think dear ol’ dad was trying to scam his youngest.

Here is the problem with a lot of these life insurance + investment packages. The numbers may not be wholly accurate but they illustrate the point. You end up paying $60,000 for $50,000 in insurance and $50,000 in investment so it’s $100,000 right?


It’s an either/or payout so you get either $50,00 for your investments OR $50,000 on your death. They make $10,000 either way.

And ask yourself this: why are you borrowing your own money?

Whole life does make some sense if you’re young and healthy, because the premiums are dirt cheap. It doesn’t make a lot of sense if you’re middle-aged because it is so expensive, and because you often outlive your need for life insurance.

And, as I said upthread, an overfunded VUL isn’t a scam. It’s just not for everyone.

My broker says the premiums would be $2,000-$3,000 a month for what she recommends for a death benefit + overfunding.

That’s a lot. Doable, but not what I want to do. Pass.

One point that I’ve encountered is the fact that a fixed life insurance benefit component loses purchasing power over time, and I believe VUL/whole life insurance policies have rising premiums as one ages compared to fixed payments for term insurance.

A death benefit of $250,000 today for someone who is 40 may mean very little 40 years from now for the beneficiaries who hypothetically collect when the insured dies at age 80. All along the way there are increasing premiums to pay and possibly higher annual expenses/fees that the investment component is wrapped in.

One point MsRobyn or someone might be able to clarify… are insurance payouts that beneficiaries claim exempt from estate taxes and the such because they aren’t technically assets owned by the deceased insured, but rather the life insurance company? I’ve vaguely read these products may be appropriate for people who may be passing on more than the exemption amount for estate taxes to heirs.

Payouts from life insurance policies are tax-exempt, period. I don’t know why they are, they just are.

Life insurance is appropriate for a lot of reasons, but for some, it’s a waste of money because it’s not necessary. Only your insurance agent knows for sure. :slight_smile: