What is a 'Life Income Plan'

A Life Income Plan is an asset-pooling strategy for high-income professionals that ensures a lifetime guaranteed income for retired plan participants. Similar to charitable remainder trusts, life income plans are funded by pooled investments.

BREAKING DOWN 'Life Income Plan'

A Life Income Plan is a retirement income strategy in which assets are transferred into a managed pool of funds and paid out to fund contributors in the form of a lifetime guaranteed income.

In many ways, life income plans are similar to charitable remainder trusts, in that they provide periodic income dispersals to beneficiaries for a specified period, after which the remainder of the fund is donated to a designated beneficiary, usually a charity.

A key difference between life income plans and charitable remainder trusts is that life income plans are funded from pooled income.  Pooled income funds are usually invested in a portfolio of fixed-income securities, and the fund managers are responsible for preserving or increasing the principal.

Many life income plans are are rooted in a philanthropic strategy, in which a charity manages the pool of funds. In such cases, the charity assumes control and ownership of the assets upon the death of donor, or upon the death of the last-named beneficiary.

Typically, life income plans are most appropriate for high income professionals and business owners seeking strategies to ensure income replacement and continued financial independence in retirement. In many cases, life income plans also provide an element of life insurance protection as well.

While the price of entry into a life income plan can vary from plan to plan and country to country, a common scenario described in life income plan prospectuses illustrates a $100,000 initial investment. Nevertheless, some more affordable plans specify an minimum investment as small as $5,000.

Under most life income plans, the managing organization establishes an annual payment agreement with participants, ensuring minimum income payments at regular intervals, sometimes with larger payments at significant times, including injury and death.

Life Income Plans and the U.S. Pensions

Life income plans and other such instruments have emerged in recent years as strategies to replace the waning availability of private-sector pensions as retirement security for American workers.

As the U.S. private sector began to shift away from offering defined benefit pensions in favor of 401(k) plans and individual investors began to move retirement funds into IRAs, many analysts have anticipated a looming retirement crisis, as underfunded defined benefit pensions threaten to cut benefits.

Defined benefit plans were once dominant in the workforce. In 1975, the U.S. Department of Labor showed that an overwhelming majority, 98 percent of public-sector workers and 88 percent of private-sector workers, were covered under defined benefit plans. By 2005, these figures had dropped precipitously in the private sector. 92 percent of public workers were still covered under defined benefit pensions, but only 33 percent of private-sector employees retained coverage.

In 2012, the Bureau of Labor Statistics reported that only 18 percent of private-sector employees were covered by defined benefit pensions, and in a 2015 study released by the Schwartz Center for Economic Policy Analysis at the New School, it was reported that 68 percent of working age people did not participate in an employer-sponsored retirement plan at all.

As these trends continue, analysts continue to speculate on solutions, while workers are encourage to seek and invest in independent retirement plans which can fit their own budget requirements and continued standard of living needs.

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