The number one criticism of the Life Insurance Retirement Plan online is that the fees are simply too prohibitive, but the question is really what are they expensive compared to?
The best way to compare the fees is to think about where else you could be putting your money, in most cases that’s going to be some sort of investment. When it comes to typical investment fees, you’re looking at an expense ratio of 1.5%.
The baseline number to compare the fees with the LIRP is that 1.5%, which means you have to consider whether the LIRP is more or less expensive than the traditional 401(k) account.
The LIRP is a bucket of money that grows tax free, there is no contribution limit or income limitation, you don’t pay taxes if you take the money out in the right way, it doesn’t affect provisional income and there isn’t likely to be any legislative changes down the road.
The IRS requires that a certain amount of money flows out of your LIRP in order to pay for certain expenses.
The expenses in the LIRP are likely to be much cheaper than what you are paying in your 401(k) or IRA. The fees are a little bit higher in the early years of the LIRP compared to other accounts, but the fees drop off a cliff after the eleventh year.
When you average out the fees over the life of the program, it’s going to cost you less than the 1.5% baseline.
Don’t do an LIRP if you don’t plan on keeping it for your whole life. There are a lot of benefits to the plan that only make sense if you keep it until you die. If you do plan on keeping it for your whole life, why would you be concerned with the higher fees in the beginning instead of considering the impact over your lifetime.
Since the plan isn’t a short term investment, it doesn’t make sense to only pay attention to the negative return in the first six years. The longer you keep the plan the closer your internal rate of expense gets to 1%.
If the internal rate of return reflects a 1% expense over the life of the program, it might as well have been that rate for the entire time.
The costs are significant over the first ten years, but if you stick with it for the rest of your life the more dramatically the expenses reduce and the better the internal rate of return becomes.
The LIRP may come with expenses but you also get advantages by paying those expenses. If you could get a 6.5% return without taking any more risk than you are accustomed to taking in your savings account, would you?
The expense issue with LIRPs is overblown. We have to contextualize the expenses within the broader picture and also consider the benefits it conveys over the course of our lifetime.
LIRPs are not a silver bullet, they should complement your other tax-free streams of income. If you put it all together just the right way you get to be in the 0% tax bracket.
When you have the right levels of money in the right accounts, that’s how you reach the 0% tax bracket, but if some of those levels are off you are not going to make it so make sure you work with a trained professional.
The LIRP also operates as a solution for long term care in addition to all the other advantages that it comes with.