A life insurance retirement plan—or a LIRP—is when you use the cash value of a permanent life insurance policy to supplement your retirement savings. The primary purpose of life insurance is to ensure your loved ones are financially supported once you’re gone, but the cash value of a permanent policy can be used in a variety of ways. This article will explore the benefits of a life insurance retirement plan and if it’s the right option for you.
How does a life insurance retirement plan work?
Life insurance retirement plan (LIRP) is a type of permanent life insurance or whole life insurance that can be used to supplement other retirement investments. The policyholder pays their premiums (and often pays more to grow the account) and the policy accumulates a cash value. You can then withdraw or borrow against the cash value of the policy to provide income in retirement that isn’t subject to taxes. For seniors with fixed incomes, this can help lower your tax burden and help maintain your standard of living.
Who needs a life insurance retirement plan?
Life insure retirement plans are beneficial for individuals with complex financial needs or those who need life insurance coverage for their entire lives. This often includes:
- High income earners who have maxed out other retirement accounts and are seeking an additional avenue for tax-deferred savings.
- Individuals with lifelong dependents, such as family members with disabilities.
Many people won’t need life insurance by the time they retire, as many of their financial obligations—mortgage, paying for college, etc.—will likely be paid off or decreased. A LIRP does have some benefits to these individuals, though. LIRPs can be used to offset income tax burdens in retirement, because borrowing against them after they’ve matured or have an appropriate cash value isn’t counted as taxable income. This differs from a 401(k), where withdrawn funds are counted as taxable income. In addition, the cash value of a LIRP can be used to preserve a person’s estate when they die. Withdrawn funds can be used to pay estate taxes.
For high earners or people with a significant estate, this can significantly reduce the taxes owed.
Cost of Investing in a Life Insurance Retirement Plan
To have a life insurance plan that helps support your retirement, it can be beneficial to overfund the cash value of your policy by paying more than the required premium payment each month. The extra money you contribute should go toward the policy’s cash value and grow tax-deferred.
Life Insurance Retirement Plan Benefits
- There’s typically no limit to how much you can pay into the cash value of your policy.
- Many permanent life insurance policies guarantee a minimum return of the cash value.
- There’s often no restriction to when you can access your cash value, compared to the implications of withdrawing from a retirement account.
Things to Keep in Mind with a Life Insurance Retirement Plan
A life insurance retirement plan may not be the best fit for your financial needs, but there are some instances where it makes sense. Individuals with high net worth or significant income who are maxing out their other retirement investments may appreciate the flexibility a LIRP offers. Otherwise, the increased premiums may not be worth the investment; in these cases, buying a term life insurance policy and investing the additional funds might make more financial sense.
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