Life Insurance Retirement Plans (LIRP): What They Are and How They Work (2024)

A life insurance retirement plan is a permanent type of life insurance policy that builds cash value and provides a death benefit. Common LIRPs include whole life and universal life policies. As you pay the premiums for an LIPR, part of that premium is placed into a savings account, known as the cash value. The cash value grows over time at a tax-deferred, predetermined interest rate.

LIRPs are not intended to replace more traditional retirement accounts like Roth IRAs and 401(k)s but can be a way to use a life insurance policy as part of your retirement plan. One potential drawback of an LIRP is you likely won’t ever use it as a source of income if your traditional retirement accounts offer enough funds.

The key to funding your retirement with an LIRP is building the cash value of your plan. A life insurance retirement plan is considered “overfunded” if you pay more premiums than are required. This portion of the premiums constitutes the cash value, which is held in a tax-deferred savings account. Be aware, however, that the IRS sets a limit on the amount of cash you can contribute to an LIPR before it’s considered a Modified Endowment Contract (MEC). Once a life insurance plan is classified as an MEC, tax advantages for withdrawals and loans are erased, and the cash value becomes less accessible.

You can make tax-free withdrawals and loans before age 59 and a half, as long as the withdrawal amount is less than the premiums you’ve paid. All withdrawals from an LIPR after age 59 and a half are tax-free. Like all life insurance products, the face value of the policy is paid out, tax-free, to your beneficiaries in the event of your death. The death benefit would be reduced by any loans or withdrawals you had previously taken out and not replaced or paid back.

Traditional retirement plans, including 401(k)s and Roth IRAs, are designed to help you build the savings you need for retirement. Annuities are another option that can give retirees a steady stream of income, either at a fixed or variable rate. Brokerage accounts are not specifically designed for retirement savings but can provide a valuable supplement to retirement funds, especially if you’ve maxed out your retirement contributions.

LIRPs are more versatile than more traditional retirement savings options because of their dual roles of distributing both death benefits and building retirement income. And like a Roth IRA, they allow tax-deferred cash gains and tax-free withdrawals after age 59 and a half. Of these options, only the LIRP gives you the peace of mind of a death benefit payable to your beneficiaries.

Above all, retirement planning requires taking an integrated, individualized strategy for the planner. If you have any questions about your retirement and how to plan, we suggest consulting a financial advisor.

Only cash value life insurance plans can be used in retirement planning. This includes permanent life insurance policies like whole life, universal life and variable life.

• Whole life insurance: These plans are the most common form of permanent life insurance coverage, providing a fixed face value or death benefit for your entire life and building cash value at a fixed interest rate. Read more: Top whole life insurance policies
• Universal life insurance: Unlike whole life insurance, universal life insurance policies offer flexible interest rates, which can mean greater cash accumulation in favorable market conditions and slower returns in poor conditions.
• Variable life insurance: This is the riskiest form of permanent life insurance because the policyholder chooses their own investments. The cash value is not guaranteed, and the policyholder could lose money if the investments perform poorly.
• Term life insurance: Unlike a permanent life insurance policy, a term life insurance policy has no cash value and cannot be used as a source of retirement income. Therefore, term life policies are best for those looking for a cheap life insurance option. Read more: Top term life insurance policies

All life insurance plans have one thing in common — they provide money, called a death benefit, to beneficiaries when the policyholder dies. Only cash value plans can be integrated into a retirement plan because they allocate a portion of your premium payments into a savings account.

Deciding how much income your family will need when you pass is an important factor in considering whether to use life insurance as part of your retirement investment strategy. Your personal financial situation and goals will largely determine your strategies for building retirement funds.

For instance, if you’re accustomed to a comfortable standard of living you’d like to maintain in retirement or plan to travel extensively, you might want to consider contributing extra funds to an LIRP whenever possible.

Keep in mind that life insurance premiums can vary dramatically based on the age and health of the applicant. Permanent policies have much higher premiums than “temporary” policies like term life plans. The younger and healthier you are, the lower the cost of a permanent life insurance plan. The face value of the policy, where you live, your occupation and your lifestyle will also factor into the price of premiums.

We suggest requesting a quote from our best life insurance companies to learn more about your specific costs.

A LIRP may not be the most effective financial planning tool for the average person, but there are people for whom these plans make sense.

• High net worth: Individuals whose investment goals exceed the maximum limits of their other retirement savings accounts can benefit from LIRPs.
• Supporting dependents: Those with family members who rely on them for financial support or need long-term care may also benefit from an LIRP. For these situations, the death benefit would provide the funds necessary to support the family members upon the policyholder’s passing.
• Large financial goals: LIRPs can be incorporated with traditional retirement savings accounts to build a more aggressive, robust savings plan.

Life insurance retirement plans are unique policies that blend two different financial planning tools into one. They not only provide a payout to your loved ones in the event of your death but also supply a savings cushion that can augment your other savings sources.

Before buying life insurance or other investment products, it’s advisable to consult a licensed professional, such as an estate-planning attorney, financial professional or licensed life insurance agent, to ensure you obtain products tailored to your needs.