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Explore Life Insurance Retirement Plans
Life insurance retirement plans are permanent life insurance policies that can be used to help fund your retirement. See what kind of life insurance is right for you with SelectQuote.
Life Insurance Retirement Plan (LIRP)
As you sit down to plan for your retirement, you have plenty of tools available to make the transition as seamless as possible. You’ll take steps to prepare for changes in your health insurance coverage, streamline your budget to account for a fixed income and save to help provide for your future goals. But there’s still one tool you may not have considered as a key part of retirement planning: life insurance retirement plan (LIRP).
In addition to IRAs, 401(k) plans and pensions, did you know that permanent life insurance, universal life insurance and whole life insurance can often be a useful component of an estate planning strategy? If you’re a high-net-worth individual, you should be aware of how a life insurance retirement plan (LIRP) can factor into your future financial planning strategy.
What is a LIRP?
Life insurance retirement plans are types of permanent life insurance policies, like whole life and universal life insurance. Because permanent life insurance often includes a cash value component, they can be used to help fund your retirement. When it comes to a term life insurance policy, there is no cash value component, so the term policy cannot be used as a LIRP.How can you use a LIRP to fund retirement?
One valuable life insurance retirement plan benefit is you can use the cash value of a policy to supplement your retirement income and offset any taxable income to stay in a low-to-zero income tax bracket. For many retirees on fixed income, maximizing the amount of money you have can go a long way toward maintaining your standard of living. Reducing your taxable income is one way to do so. Note that LIRP investments—like other retirement funds—are subject to capital gains tax.
What is the difference between a life insurance retirement plan and a 401(k) or IRA?
You shouldn’t count on a LIRP as your primary mode of retirement funding. Dedicated retirement investment accounts, such as 401(k) accounts or IRAs are often a better option. Cash value insurance doesn’t possess the same investment opportunities and offer relatively low rates of return compared to these plans:
- A 401(k) plan is often offered to employees as part of an overall benefits package. Employers can and often choose to match contributions to a 401(k) up to a certain percentage. Most 401(k) investments are tax-deferred and are therefore taxed upon withdrawal, usually in retirement.
- IRAs are retirement savings plans that you open and fund without contribution from your employer. The investments are made with after-tax contributions, meaning you pay no taxes if you withdraw them after you turn 59 ½.
Benefits and Drawbacks of a Life Insurance Retirement Plan
In some cases, LIRP investment can give retirees some additional flexibility, but it shouldn’t be your sole retirement strategy. LIRPs have some benefits, but only after you’ve maximized your contributions in more traditional methods like a 401(k) account and IRAs.
| Benefits of LIRPS | Drawbacks to LIRPS |
| Guaranteed death benefit | Expensive premiums |
| No contribution limit | Lower investment returns than other retirement plans, such as 401(k) and IRA |
| Penalty-free access to cash value (if borrowing) that can supplement income without impacting your tax bracket | Fees for withdrawals depending on how long you’ve had your policy |
| Guaranteed minimum | No tax-deductible contributions |
| Tax-deferred cash value | Cash value loans accrue interest until repaid. The loan and its interest are deducted from the death benefit when you die. |
| Long-term care rider options |
Who should buy a life insurance retirement plan (LIRP)?
Many financial advisors would tell you that LIRPs aren’t a great investment for most people due to the high cost of the policies and the limited benefits that come with a lower rate of return, but there are times when it makes sense.
- High-income earners who are looking for other options for additional retirement savings after maxing out contributions to 401(k)s or IRAs.
- High-net-worth individuals with complex estates may find a LIRP appealing due to how its death benefits work. In most cases, the death benefit from a life insurance retirement plan can be used to pay estate taxes and therefore preserve the majority of your estate for your beneficiaries.
- Parents of a special needs child or dependent may want to consider a life insurance retirement plan, especially if their dependent will require care after your death. The death benefit and cash value will provide the necessary funds to support your child/children upon the death of the insured.
