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

Shawn Plummer

CEO, The Annuity Expert

If you’re nearing retirement age, you may wonder how to make the most of your golden years. One option to consider is a life insurance retirement plan. This plan allows you to use life insurance proceeds to fund your retirement lifestyle. 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. Here’s a look at how it works.

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 and 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 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 retirement. Then, when you have a cash value life insurance policy, you’ll be able to access the money in your policy and 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. However, 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:

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, 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.

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 with an income for life and a huge tax reduction over the long term.

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Next Steps

A life insurance retirement plan may be a good option if you’re nearing retirement age and want to make the most of your golden years. This plan allows you to use life insurance proceeds to fund your retirement lifestyle. Contact us today for a quote on this type of plan – we can help get you started on the path to a comfortable retirement.

What Is A Life Insurance Retirement Plan, And How Does It Work?

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Frequently Asked Questions

What is the best life insurance retirement plan?

Whole life insurance and indexed universal life insurance are the best life insurance retirement plans because of their savings component, called cash value.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on 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.

The Annuity Expert is an online insurance agency servicing consumers across the United States. 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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