David’s upcoming book, The Infinity Code, is a novel that talks about important financial concepts and themes, and that will keep you on the edge of your seat through the entirety of the read. The book will be available on Amazon and other stores soon.
In David’s opinion, starting a LIRP is a bit like getting married, so it’s important to be meticulous in your research.
When it comes to LIRPs, the IRS allows you to take a loan – the way these loans work is that instead of taking a loan from your cash value itself, you’re taking it from a life insurance company.
A zero cost loan, also known as a wash loan, is when, for example, you were charged 3% by the life insurance company. In order to make it an arms’ length transaction, the amount they charge you and the sum they credit you is always the same.
David warns against going for loans that don’t have a guaranteed 0%. In an ideal-case scenario, you’d have tax-free and cost-free distributions.
One of the issues that may raise has to do with the fact that for the IRS, if a person doesn’t have at least $1 in their cash value when they die, then all of the tax-free loans they got along the way need to have their taxes paid back, all in the same year.
David strongly believes that 0% spread loans are one of the stipulations that you must insist upon, when it comes to a LIRP. The cash value of a life insurance company might sound great, but it really is inconsequential when compared to what David sees as the most important provision: your loan provision.
If you decide not to opt for a 0% spread that’s guaranteed, then you run into the risk of having life insurance companies adjusting that in order to hit their quarterly forecast. Hence, it’s paramount that you ask for a guaranteed 0% loan.
For David, a good loan provision charges no net interest to the client, and it’s also worded in a clear and unambiguous way. A band loan provision, on the other hand, not only has net interest, but it’s also worded using nebulous terms, and has convenient escape clauses (convenient for the life insurance company, that is).
David isn’t convinced that most of the financial services industry understands the implications of these types of loans. Therefore, he recommends that, before you go down the road with a financial advisor talking about an LIRP, you insist upfront that they tell you all of the details of the loan provision of that particular contract.
You should be familiar with your loan provisions because, otherwise, they will come back to bite you. The loan interest will accumulate, it will compound over time, and it will force you to go bankrupt years in advance than when you ever thought possible.