What Is a Life Insurance Retirement Plan (LIRP)?

Key Takeaways

• A permanent life insurance policy can be another stream of income during the retirement years if the policyholder’s priority is not the death benefit.
• Loans against a permanent life insurance policy can be paid back but withdrawals cannot.
• If a loan is not repaid on a permanent life insurance policy, it will be deducted from the death benefit.
• If your permanent life insurance policy pays its own premiums, a withdrawal or loan may require you to make monthly premium payments.

Retirement Planning

• Build tax-deferred savings to use during retirement in withdrawals or after surrendering or selling the policy
• Death benefit for beneficiaries (what’s left after cash withdrawals)

• Build tax-deferred savings to use for loans that are paid back
• Death benefit for beneficiaries is the main goal, so the cash value is maintained, not used

Cash Value

• Permanent life insurance policies, such as whole life, universal life, variable life or group universal life, build cash value over time.
• Money withdrawn from these types of policies can be used to supplement retirement income.
• The cash value of permanent life policies can pay the monthly premium, unless substantial amounts are withdrawn from the account.

• Term life policies do not build cash value.
• The cash value of the policy is not used during retirement to ensure that there are no deductions from the death benefit.
• You must pay monthly term life insurance premiums for the term of the contract.
• For permanent life insurance policies, the savings will cease to pay the policy’s premiums if large loans or withdrawals make a substantial impact to the cash value.
• If the policy doesn’t pay itself and you don’t make premium payments, you will lose the death benefit and remaining cash value.

Tax Benefits

• Permanent life policies’ savings accounts grow tax-free.
• Withdrawals are taxed only if you withdraw more than the basis (the policy amount minus earnings)
• If a permanent life insurance policy becomes a modified endowment contract (MEC), which means that it has reached the limit as a tax shelter, it is considered taxable income.
• A 10% early withdrawal penalty applies before age 59.5.

• There are no tax benefits for a term-life insurance policy.
• If the savings account is not used to supplement a retirement plan, the death benefit continues to grow.
• The death benefit and cash savings are separate, and beneficiaries only receive the death benefit.

Contribution Limits

• You can’t withdraw money from a permanent life insurance policy and put it back in. It may also be deducted from the death benefit if it dips into the basis.
• You can return the amount you borrow as a loan against the policy.
• There are no contribution limits on permanent life insurance policies.

• There is no focus on contributions beyond paying premiums for coverage on a term life insurance policy.
• The larger the savings on a permanent life insurance policy, the greater the death benefit.

Cost

• Permanent life insurance policies are more expensive than term-life policies.
• Speak with a knowledgeable life insurance agent to see which type of permanent life insurance policy fits your financial goals.
• Permanent life insurance policies will begin to pay their own premiums after several years, but only if you do not withdraw substantial amounts of money or take out a loan that you do not repay.

• Term life insurance is much cheaper than a permanent life insurance policy.
• It’s important to speak with a seasoned life insurance agent to go over which permanent life insurance policy fits your needs and budget best.
• Permanent life insurance policies will begin to pay their own premiums after several years, especially if you do not withdraw money or take out a loan.