Life Insurance Retirement Plan (LIRP): A Tax-Free Retirement

Shawn Plummer

CEO, The Annuity Expert

You may use a universal life or whole life insurance policy to enhance your retirement payout, but several risks are involved. Compare a life insurance retirement plan (LIRP) to a 401(k) and an IRA to discover how they compare.

If you have any other cash value life insurance — you can use the cash value in your life insurance policy to boost your retirement income. A LIRP is another name for this kind of plan.

What is a life insurance retirement plan (LIRP)?

A life insurance retirement plan (LIRP) is a continuing lifetime policy (permanent life insurance) that utilizes the cash value component to assist retirement income. LIRPs are similar to Roth IRAs in that you won’t pay taxes on any withdrawals once you reach age 59 1/2, and gains are tax-deferred.

What is the cash value?

Your life insurance policy’s premium payment is invested in a tax-deferred, investment-like savings component called the policy’s cash value. The precise quantity that goes into savings is determined by your policy, as well as the cash value account’s growth over time.

After you’ve kept the cash value for a certain length of time, or after it accumulates a specific amount, you can withdraw money from it or take out a loan against it to receive tax-free income in retirement.

How Does A Life Insurance Retirement Plan Work?

LIRPs can help you grow your existing retirement accounts and fill the gaps if the stock market falls. If you max out contributions to your traditional investment accounts, you may use any extra money to increase your cash value, providing tax-deferred investment growth.

Building Up The Cash Value

Some policyholders choose to overfund their cash value life insurance policies to build up enough money value to backfill retirement. The additional money they pay is deposited into the policy’s cash value and is tax-deferred growth.

This approach, on the other hand, only works if you don’t need to make withdrawals before you’re age 59 1/2: An overfunded cash value plan that exceeds the yearly deductible (set by the IRS) is converted into a modified endowment contract (MEC) and faces additional taxes and penalties for withdrawals.

Spending The Cash Value In Retirement

According to popular financial recommendations, you should withdraw no more than 4% of your savings each year during your retirement. When you have a cash value life insurance policy, you’ll be able to access the money in your policy as well as any other retirement accounts.

Paying For Long-Term Care Expenses

A long-term care rider is available on most life insurance policies, including cash value policies. If you need to pay for a nursing home or have other medical expenses associated with aging, this add-on gives an accelerated death benefit as you age.

Who needs a life insurance retirement plan?

By the time you retire, most people will not require life insurance. That’s because, as you age, your financial obligations — such as paying off a mortgage — generally lessen while your need for life insurance increases.

Cash value life insurance can make sense for people with more complex financial needs or those who know they will require life insurance coverage for the rest of their lives. These are some examples:

  • Individuals who have already used up all of their other retirement accounts and are looking for a new tax-deferred savings vehicle.
  • Those who have children with disabilities, for example, who will require life insurance after they’ve retired.
  • The younger the insured is, the better. Time is the name of the game utilizing this tax-free retirement strategy.

How much does it cost to invest in a LIRP?

Your permanent life insurance premiums are invested in your LIRP, and you may choose to increase the amount. Permanent life insurance premiums are five to fifteen times greater on average than term life policies. So if the price is what you’re searching for, buying a term policy and investing the money in a Roth IRA or a deferred annuity could save you a lot of money over the long term.

Life insurance retirement plans vs. 401(k)s & IRAs

Regardless of the life insurance policy you choose, your retirement should still be funded through a dedicated retirement account like a 401(k) or an IRA. Cash value life insurance has fewer investment alternatives and lower rates of return when compared to a 401(k) or IRA.

AttributeLIRP401(k)Roth IRAAnnuity
GrowthTax-deferredTax-deferredTax-freeTax-deferred or free
Contribution LimitsVaries$19,500$6,000
Income Start DateAge 59½ +Age 59½ +Age 59½ +Age 59½ +
Income TaxesTax-free (loans)TaxedTax-freeTaxed or Tax-free

Pros and cons of life insurance retirement plans

In some instances, a life insurance retirement plan may be more flexible, but there are several valid reasons why most people should not use cash value life insurance for retirement.

ProsCons
Guaranteed death benefitExpensive premiums
Access to cash value (Loans)High fees
No contribution limitsLower investment returns
Tax-deferred cash valueAccrue interest on loans
Guaranteed minimumContributions are not tax-deductible

Is permanent life insurance a good investment for retirement? 

A LIRP isn’t worth it for most people, but there is no “one-size-fits-all” approach to retirement savings. For most individuals, the high cost of permanent insurance and the lower rates of return outweigh the benefits of having an extra retirement account.

A LIRP can be a good option if you want to contribute the maximum amount to your retirement account each year and can’t put any more money into a typical post-tax investment account.

The best alternative to a LIRP is buying a term life policy and funding a Roth IRA or nonqualified annuity. Your income in retirement can still be tax-free and last your entire lifetime with a Roth IRA annuity. Additionally, only interest earned is taxed in a nonqualified annuity, providing you an income for life and a huge tax reduction over the long term.

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Shawn Plummer

CEO, The Annuity Expert

I’ve sold annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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