There are five important elements your LIRP must have if you are going to have it for the rest of your life. Similar to getting married, these are things you need to look for before committing to the plan.
You don’t want to get 10 or 20 years in before you realize there is a ticking time bomb in your LIRP.
The first thing your LIRP must have is the ability to get a guaranteed zero percent loan. The best strategy for your LIRP is to work with a company that allows you to take a loan against your plan with a net cost to you of zero percent. This means you have to be diligent in assessing the contract and make sure the guarantee is part of it. Some companies reserve the right to adjust the loan interest rate at their leisure which is exactly what you want to avoid.
The caveat is here is that just because someone is saying that they are giving you a zero percent loan, that doesn’t mean it’s guaranteed. This is one of the most important provisions in your contract.
The second thing to look for is interest in arrears, not interest in advance. The problem with interest in advance is the lost opportunity cost over the course of the year. Some companies credit you in a way that makes interest in advance work in your favour, but they are few and far between.
The third thing to look for is a strong financial rating. There are several rating companies, and the way they rank financial products can vary, or even contradict each other. The best way to determine the financial footing of a company is to use a Comdex rating instead. A Comdex rating below 90 is a sure sign you should avoid that company, and ideally, you’re working with a company with a rating of 95 or higher.
The fourth thing your LIRP must have is called an overload protection rider. In order for your death benefit to pay out, your cash value must be at least $1. If your cash value runs out before you die, there are some intense tax repercussions. An overload protection rider is like a failsafe that protects you from that scenario by lowering your death benefit.
The last thing your LIRP absolutely must have is a chronic illness rider. This rider allows you to access your death benefit in advance of your death for the purpose of paying for long-term care without paying anything along the way.
Compared to a long-term care rider, where you are paying money along the way for the privilege of receiving 25% of your death benefit in advance of your death, the chronic illness rider is superior. If you pay for a long-term care rider throughout your retirement and you die peacefully in your sleep without ever having needed long term care, all of those expenses were a drag on your cash value along the way. You end up having paid for something that you never had to use. A chronic illness rider doesn’t have the same opportunity costs.
For more info on the 20 things your LIRP must have, check out the book Look Before You LIRP, preferably before you commit to a life insurance policy that doesn’t have what you need in it.