What Is a Life Insurance Retirement Plan (LIRP)?

secure Editorial Standards

SmartFinancial Offers Unbiased, Fact-based Information. Our fact-checked articles are intended to educate insurance shoppers so they can make the right buying decisions. Learn More

A Life Insurance Retirement Plan (LIRP) is a financial strategy using the cash savings from a permanent life insurance policy during the retirement years.

Unlike term life insurance, permanent life insurance policies have a cash savings account, which eventually pays the policy’s premiums itself and creates tax-free cash that you can use for whatever you want. The death benefit of an insurance policy is separate and provides a payout to beneficiaries.

It’s important to remember that when taking out cash, you must pay it back if the cash value ceases to cover premiums or if it subtracts from a death benefit that you want to leave to a loved one. Also, a life insurance retirement plan is not designed to replace a 401K or an IRA but can enhance your current savings plans for retirement. Here’s more.

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.

The Benefits of a Life Insurance Retirement Plan (LIRP):

  • Tax-Free Growth: The cash value of your permanent life insurance policy will continue to grow, without being taxed, much like a 401(k) and IRA. Permanent life insurance premiums are expensive, so it’s recommended that you allow the cash value to grow and pay its own premiums, which increase over the years.
  • Tax-Free Withdrawals: If you’re over the age of 59.5, withdrawals from the cash value are tax-free, as long as they follow IRS guidelines and don't exceed the policyholder's contributions. This rule is called the "basis."
  • Tax-Free Death Benefit: In addition to the cash value of the policy, a permanent life insurance policy includes a separate death benefit that is paid tax-free to the named beneficiaries on the policy.

    If you withdraw more than what needs to be in the account to cover premiums, the amount will be deducted from the death benefit. You also have the option of making the premium payments on your own, but they do become more expensive as you age.
  • Foregoing the Death Benefit: If you don't plan on leaving behind money for your loved ones or as a legacy to a business, you’ll have more tax-free cash to use for whatever you want.
  • No Contribution Limits: Unlike 401Ks and IRAs, there are no annual contribution limits. LIRPs are a secure way to save money on taxes, but it’s recommended that you do so only after you max out the contributions to your 401K and IRA.

    If you’re patient and wait until you’re 59.5 or older, you won’t pay taxes on loans and withdrawals from the cash balance, so long as your cash value does not exceed limits.

benefits of life insurance retirement plan (LIRP)

How Does a Life Insurance Retirement Plan Differ From Regular Life Insurance?

A Life Insurance Retirement Plan (LIRP) is just the way a regular life insurance policy with a cash value is used. The main difference is in the type of life insurance a policyholder buys.

Term life is more affordable and therefore more commonly purchased but it does not have a savings component that can be cashed out, surrendered or borrowed against. You can always sell a term life insurance policy for cash, but that’s the only way you will be able to use a term life policy during retirement.

Here are all the key distinctions:

 

Life Insurance Retirement Plan

Regular Life Insurance

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.

Who Sells Life Insurance Retirement Plans?

If your life insurance policy has a cash value, you may be in luck. Life insurance retirement plans are offered by various financial institutions and insurance companies that specialize in permanent life insurance products, like whole life, universal life, or indexed universal life insurance policies. Compare rates on permanent life insurance policies, to get the best rate.

Get a Free Quote for Life Insurance Today!

Life Insurance Retirement Plan FAQs

What are the pros and cons of a life insurance retirement plan?

LIRPs are a great supplemental retirement strategy, especially for people who have maxed out their 401K and IRA options. They offer flexibility and reduce your taxable income, but permanent life insurance can also be expensive and complex.

Is life insurance a retirement plan?

Life insurance can be a supplemental retirement strategy, which works great when you’ve maxed out a 401K or Roth IRA. Not only does it reduce taxable income, it can be withdrawn tax-free if you wait until age 59 and a half to use the savings.

Are there any risks associated with LIRPs?

If the policy lapses due to non-payment of premiums, you may lose everything. If withdrawals exceed certain limits, the income from the policy could be taxable, and unpaid loans can reduce the death benefit.

Get a Free Life Insurance Quote Online Now.