Life Insurance Retirement Plans (LIRPs)

Life insurance provides financial security for loved ones in the event of your death — but in some cases, it can also be a way for individuals to help augment traditional forms of retirement saving, such as an IRA. A life insurance retirement plan (LIRP) takes advantage of the cash accumulation and tax features of a permanent life insurance policy to supplement your income during retirement. However, it’s worth understanding the demands and potential pitfalls of this less-common retirement planning tool.

What are life insurance retirement plans?

In general, life insurance exists to provide a death benefit to your beneficiaries at the time of your death. However, certain types of permanent life insurance can also be used to build cash value that can supplement your retirement savings. For individuals who have maxed out their contributions to traditional retirement accounts such as a 401(k) or IRA, there may be certain tax advantages to using a life insurance retirement plan (LIRP) as part of their long-term financial planning strategy.

It’s worth noting that only permanent life insurance, such as whole life or universal life insurance, can be used for an LIRP. Term life insurance policies, which are only designed to last for a certain term period, don’t have the ability to build cash value over time.

How to use life insurance in your retirement planning

Think carefully about how your life insurance may fit into your retirement plans. You may want to speak with a Certified Financial Planner or Chartered Life Underwriter before implementing an LIRP strategy. Here’s what a typical LIRP strategy might look like:

• Start by shopping for permanent life insurance: Begin by comparing permanent life insurance policies. Indexed universal life insurance is a popular choice for this strategy. Take the time to review the differences between top-rated life insurance providers to find the policy with the best fit for your financial goals.
• Keep up with premiums to keep your policy in force: You’ll pay premiums to keep your LIRP in place. Part of the premium will go toward paying for the insurance costs, while a portion of your premium is diverted to your policy’s cash value account which earns compounding interest.
• Consider overfunding: One common strategy to build enough cash value to supplement your retirement savings is to overfund your LIRP. Overfunding refers to paying more than the required premium in order to maximize the amount you’re putting towards the policy’s cash value.
• Consider riders: Life insurance policies can be customized with riders that may prove beneficial. For example, a long-term care rider can provide funds if you find yourself in need of long-term care services.
• Access your cash value through loans or withdrawals: When you reach retirement — or before, if you choose — you can take advantage of the cash value you’ve built up through your LIRP in the form of loans or withdrawals. Both the loan and withdrawal amounts are tax-free up to your cost basis (the amount you’ve paid in premiums). Loans accrue interest and the balance will need to be repaid. You don’t pay interest or fees on withdrawals, but they are a permanent reduction from your death benefit.
• Protect your loved ones’ future with a sizable death benefit: At your death, the remaining death benefit will be paid to the policy’s beneficiaries. Note: If you have a loan balance, this is first deducted from the death benefit payout.

Is a life insurance retirement plan right for me?

The primary purpose of life insurance is to provide death benefits to beneficiaries, but an LIRP can make sense for some individuals. If you’ve maxed out your contributions to traditional retirement plans and have significant assets left over that you’d like to invest, an LIRP may be right for you.

The major advantages of an LIRP are 1) there’s no maximum contribution amount set by the IRS and 2) there are no tax penalties for accessing the funds before a certain age. If you’re sitting on liquid assets that you’d like to invest but are frustrated by IRS caps on your IRA or 401(k), it may be worth looking into LIRP options. Consider working with an experienced financial advisor to help you decide if an LIRP is a good strategy for you.

Pros and cons of LIRPs

Here are the primary potential advantages and drawbacks to consider with a life insurance retirement plan:

Pros:

• No IRS cap on contributions
• Death benefit for beneficiaries
• Interest rates may be guaranteed
• No minimum age requirements to access funds

Cons:

• Tax status can become complicated
• Can be expensive to maintain
• High surrender charges that can last for up to 16 years (charges do decrease each year)
• Life insurance is typically not an effective investment vehicle

How much do LIRPs cost?

The cost of an LIRP and the amount of money you put into it can vary depending on your financial situation, circumstances and retirement goals. Your premium and financial situation may determine how much extra money you will put into your LIRP, and your premium is dictated by personal rating factors like your age, lifestyle and health status. Your chosen policy type and riders will also impact your premium. Typically, life insurance policies are cheaper for younger individuals and those in good health. Policies with lower death benefits also typically see lower premiums.

Depending on your goals for your LIRP, you may choose to adjust your coverage amount and contributions. For example, if you do not have much need for life insurance, but you want to use an LIRP as a vehicle for retirement funds, you might choose a policy with a lower coverage level that might have a lower premium. This may allow you to use extra funds to build your cash value component for more robust retirement funds, but your beneficiaries will receive a smaller death benefit when you pass away.

LIRPs are typically not designed to be used as a sole retirement planning vehicle. These plans are typically used in conjunction with traditional retirement plans, like IRAs and 401(k)s, to supplement retirement funds with a flexible cash value component. Speaking with a licensed financial professional may be the best way to determine if an LIRP could advance your retirement goals.

Frequently asked questions

• What are the best life insurance policies to use for a LIRP?
  

  The best policies for an LIRP will depend on your circumstances, goals, timeline and insurance company. Some types of permanent life insurance offer a higher potential for gains but include fewer protections against losses. Other types can offer more guarantees but have a lower potential for gains. Generally, forms of variable life insurance have fewer protections and greater gains potential, while whole life insurance policies carry a lower level of risk but less growth potential. You may want to consider discussing your goals with a certified financial planner or a licensed insurance agent to determine what the right path is for you.

• Do all companies offer life insurance retirement plans?
  

  Any company that offers permanent life insurance may have a policy that you can use as an LIRP. It may be beneficial to discuss your needs with a licensed agent before implementing a life insurance retirement plan strategy.

• What happens to my money if I want to cancel my LIRP?
  

  There are a couple of ways to approach canceling your permanent life insurance policy, both with different outcomes. The simplest approach is to surrender your policy to the insurer. If you choose this approach, you’ll be paid the cash value of your policy, minus any surrender charges or unpaid loan balance. If the surrender value is greater than your cost basis, you may also owe taxes. The other option is to sell your policy on the market. If successful, this will transfer full ownership of the policy to the buyer for whatever price is agreed upon — but again, you may be responsible for taxes if you sell for more than you’ve paid in premiums. Some insurers may help sell your policy if you choose this route, but that is not always the case. In both cases, you lose access to the policy and its benefits or payouts afterward.

• Is life insurance good for retirement planning?
  

  For most people, life insurance isn’t the best vehicle for retirement planning, as it’s designed for a separate purpose: providing a death benefit to your loved ones upon your death. However, if you’re already maximizing your traditional retirement plans and have a significant amount of disposable assets left over, using life insurance as a vehicle to supplement retirement savings could make sense. You may want to speak with a certified financial professional to determine whether an LIRP fits your personal financial situation and retirement goals.