Should You Use a Life Insurance Retirement Plan (LIRP)?

Exploring the concept of “Infinite Banking” and comparing life insurance retirement plans to traditional retirement strategies.

If you’ve been browsing TikTok, Facebook, or LinkedIn, you’ve likely seen posts promoting life insurance as the “ultimate retirement solution”. But is it really the best way to go about planning for your retirement? Let’s explore.

Recently, I was asked to provide some insights for an article on life insurance retirement plans on Medium.com. This request led me to revisit the concept, particularly through the lens of Nelson Nash’s book, Becoming Your Own Banker. Nash’s work advocates for the idea of using dividend-paying whole life insurance policies from mutual insurance companies as a financial strategy, often referred to as the “infinite banking” concept.

As social media goes, once I began to research life insurance I was flooded with videos and articles online that all seemed to present life insurance retirement plans as not just an option, but as the way to save for retirement. This approach often positions these plans as a replacement for traditional retirement accounts like Roth IRAs or 401(k)s. But before jumping on the bandwagon, it’s essential to understand what these plans offer—and what they don’t.

Indexed Universal Life Insurance and Market Comparisons

One of the most popular products being promoted is the indexed universal life insurance (IUL) policy. These policies are often sold with the promise that you can participate in market gains without the risk of market losses. 

Sounds great, right? But let’s dig a bit deeper.

The interest credited to an IUL policy is based on the performance of a stock market index. However, unlike direct investments in the stock market, these policies don’t deliver the same returns. Research shows that the returns from IULs are much closer to what you’d expect from bonds, not stocks. Why? Because insurance companies primarily invest your premiums in bonds, making it challenging to generate stock market-like returns.

Should You Use Life Insurance for Retirement Planning?

The real question isn’t whether life insurance should be your primary retirement vehicle but whether it should be part of your overall retirement strategy. Life insurance can play a role in retirement planning, but it’s crucial to approach it with a clear understanding of its strengths and limitations.

One of the biggest dangers with the current trend of life insurance retirement plans is the notion that this is the only way to plan for retirement. This one-size-fits-all mentality can lead to missed opportunities in other, often more flexible, retirement savings vehicles like Roth IRAs, 401(k)s, and brokerage accounts.

The truth is, the best retirement plan is one that incorporates multiple strategies, tailored to your unique financial situation. There’s no single product that will solve all your retirement needs.

The Infinite Banking Concept: A Deeper Look

Let’s return to Nelson Nash’s infinite banking concept. Nash’s idea is to use whole life insurance policies to “become your own banker,” effectively recapturing the interest you would otherwise pay to banks. The concept hinges on the idea that by borrowing from your life insurance policy at a lower interest rate than what banks charge, you can save money in the long run.

Nash’s strategy made a lot of sense in the 1980s when interest rates on traditional loans were as high as 23%. During that time, borrowing from a life insurance policy at 8% was a no-brainer. However, in today’s environment, where mortgage rates are around 6.75% and personal loans average 12%, the advantages of borrowing against a life insurance policy aren’t as clear-cut.

Moreover, Nash’s assumption that life insurance policies would generate returns of 6-8% is increasingly difficult to validate today. Current policies are more likely to yield returns closer to 4.5%, which is roughly on par with what you might expect from a certificate of deposit (CD). The key difference is that CD interest is taxable, while life insurance growth is tax-deferred.

The Long-Term Nature of Life Insurance

Another crucial aspect to consider is the long-term nature of life insurance policies. Nash correctly points out that it takes about seven years for a whole life insurance policy to break even. During this time, your contributions are essentially covering the cost of insurance and other fees, meaning your cash value is growing very slowly, if at all. This isn’t a get-rich-quick scheme—it’s a long-term commitment.

When someone pitches a life insurance retirement plan, ask them a few key questions: How long does it take to break even? What’s their commission on the sale? These are important factors to consider because they can significantly impact the overall effectiveness of the plan.

The Bottom Line: A Balanced Approach

So, should you include life insurance in your retirement plan? The answer is, it depends. Life insurance can be a valuable tool, especially if you’re looking to protect loved ones from the loss of income due to your passing. It can also offer tax-deferred growth and, if structured correctly, a tax-free death benefit for your beneficiaries.

However, it’s crucial to view life insurance as part of a broader strategy. It’s not a replacement for traditional retirement accounts, nor is it a substitute for a well-diversified investment portfolio. The best approach to retirement planning involves a mix of strategies, tailored to your unique goals and circumstances.

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Additional Links:

• Free retirement course: www.5StepRetirementPlan.com 
• “Can a Life Insurance Retirement Plan Help Boost Your Finances?” Medium.com 
• “Becoming Your Own Banker” by Nelson Nash
• “3 Things You Need to Know Before Buying Life Insurance”, Retirement Revealed Episode #67 featuring Mike Smith

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