The first type of LIRP is Whole Life. It goes back to the very beginning of life insurance and is designed to last you your whole life. You contribute money to your account and that money grows in a predictable way, earning anywhere from 3-5%. Because of this steady, predictable growth, people sometimes use this kind of insurance as the bond portion of their portfolio, enabling them to take more risk in other areas of their portfolio.
Similar to Whole Life but with a few distinct differences is Universal Life. This type of insurance is affected much more by the fluctuation of interest rates. This policy tends to not have as many guarantees.
Universal Life policies are not used as much in a Power of Zero paradigm. You generally see them minimally funded with guarantees that the policy will stay in force to a given age. This can be the cheapest way to guarantee a death benefit.
A Variable Universal Life policy is another type of policy that basically says that your money will be invested in mutual funds called sub-accounts. This is good for people under the age of 45 but becomes more worrisome when you’re older.
One problem with VUL is that when the cash value goes down due to market fluctuations, the amount of life insurance you have to pay for goes up. If the market goes down multiple years in a row, a Variable Universal Life policy can go into a death spiral from which it may never recover.
If you don’t have at least $1 in your cash value at the time of death, all of the tax free growth you experienced along the way becomes taxable to you all in the same year.
Indexed Universal Life is an alternative that tries to mitigate the issues with the Variable Universal Life policy. In this policy your money flows into a growth account that is linked to the upward movement of an index in the market. When the market goes up, you get to keep the gains up to a limit and when the market goes down you are credited a zero. Too many down years in a row can still be problematic since you are still paying the expenses associated with the policy. This policy can average between 5 and 7% net of fees over time.
Every ten year period averages between 2 and 3 down years.
If you are ok with an average of 3% to 5% growth over time, a Whole Life plan can be a good option for some of the money in your portfolio.
No matter which policy you have, you need to fund them correctly. The fees you’re charged in your policy are generally always the same no matter how much you contribute, so it makes sense to put in as much as you can. You want the proportion of the fees to the overall cash value to be as small as possible.
Which of the four types of life insurance policies is best for you will depend on your situation. Talk to the person that gave you the Power of Zero book or go to davidmcknight.com to find out more.
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