David often gets the question of whether a person can be too old to implement an LIRP and like most questions the answer is “it depends”.
There are a number of great reasons to implement an LIRP, but you have to keep in mind that it’s not a silver bullet for your retirement and should be paired with other streams of tax-free income.
The first benefit of the LIRP is that the money in your account grows safely and productively, but that also means that you’re not going to hit any homeruns inside that account. The LIRP is often used as the bond portion of your portfolio which allows you to take more risk elsewhere.
Money in an LIRP also grows tax-free and can distribute the money tax-free via a variety of loan options.
The next big advantage of the LIRP is the death benefit, which usually has to be the primary motivation for acquiring an insurance plan. You have to have a need for life insurance and a death benefit. A lot of people are using the LIRP as an alternative to long term care insurance.
Many people think that as they get older the money coming out of their LIRP will prevent their cash value from accumulating, but that’s just a misconception about the guidelines around the LIRP. As you get older the amount of death benefit the IRS requires you to have goes down.
There does come a point in time where the ratios of the LIRP no longer work in your favor. We need to look at the expenses over the life of the program because as life goes on the average cost of an LIRP goes down, this means that you need time to make that happen.
If you get too old by the time you implement the program you don’t have enough runway. You don’t have enough time to allow the expenses to reduce. Many of the benefits are still present but you won’t be able to use the LIRP as a distribution tool over the age of 65.
The LIRP can be a great way to pass on money to the next generation, to cover a long term care event, and still have a death benefit, but you probably don’t want to use an LIRP after age 65 if your primary motivation is accumulating money tax-free and then distributing money tax-free.
For paying for a long term care event an LIRP will always be a good option, it’s just that one of the main benefits of the LIRP no longer applies once you implement it after age 65. The plan still has a lot of good attributes, and it will mainly depend on what you want to get out of it.