Life Insurance Retirement Plans (LIRP) [2024]

It is never too early to start thinking about retirement. The sooner you start saving, the more money you will have when you retire. If you are looking into life insurance policies, you’ve probably heard about life insurance retirement plans (LIRPs). 

Some permanent life insurance has a cash value component that grows over time. You can often withdraw money from this cash value component without penalty on most policies. The only catch is that your beneficiaries won’t receive as much in the death benefit payout. 

Life insurance policies aren’t always the best to rely on for retirement savings either, as the cash value growth percentage isn’t as high as other retirement savings. Continue reading to learn all about the pros and cons of life insurance retirement plans and how they compare to other retirement saving plans like IRAs. 

Life Insurance Retirement Plans Explained 

LIRPs are permanent life insurance policies with a cash component. This means that, as long as you continue paying your premiums, the policy will cover you for the entirety of your life.

After you reach a certain age, usually about age 60, your life insurance can be cashed out. You can withdraw the cash value component of your permanent life insurance policy without having to pay taxes, and any cash value gains are tax-deferred. 

You can therefore use the money you withdraw from your cash value component or your permanent life insurance policy to help fund your retirement.  

What is the cash value portion of a life insurance policy? 

With a permanent life insurance policy, some of the premiums you pay for life insurance coverage will go into a cash value component. This cash value component works like an investment account, where the money will grow slowly over time and be tax-deferred.

When you can withdraw from the cash value component and how much you can withdraw depends upon the specifics of your life insurance policy. You can usually either withdraw money from the cash value investment account or take a loan against it. 

Your life insurance quotes are always free.

 Secured with SHA-256 Encryption

How to Use Life Insurance in Retirement Plans

So how do you use a life insurance policy to fund your retirement? We recommend using the cash value component of your life insurance policy as supplemental retirement income rather than depending upon it solely. 

Below, we’ve gone over all the important steps you should follow when working with retirement life insurance plans. 

Pay More Than Required Premium Payments 

You can choose to pay more than your required payments to increase the amount that goes into your cash value investment. The extra amount you put into your cash value investment component will grow tax-deferred. 

However, there are stipulations to doing this. For example, if you put too much money into your cash value component beyond the limit set by the IRS, it will convert to a different type of savings account and be subject to taxes. 

So if you plan to put extra money into your cash value each month, make sure you check the limits and requirements listed on your policy. 

Use the Cash Value Component 

Once you are retired, you can withdraw money from the cash value component to supplement your retirement income. Typically, you don’t want to withdraw more than 4% of your savings. Otherwise, you’ll risk running out. 

You also should only withdraw from your cash value component when needed, such as if your IRA is running low. Then you can withdraw from your life insurance policy for a year or two to allow your other retirement saving plans to continue to grow. 

Add a Long-Term Care Rider

Some life insurance policies will allow you to add a rider for long-term care to your plan. It will pay out some of the death benefits early if you need funds for long-term care. 

Examples will be if you need to go into a nursing home or have high medical costs that need to be paid due to age-related issues. Read our article about understanding long-term care insurance to learn more about adding this rider. 

Who Should Get a Life Insurance Retirement Plan 

Generally, people get life insurance to make sure their loved ones are taken care of. If they die unexpectedly when still paying off a mortgage or sending kids to school, life insurance ensures no financial burden falls on them. As people age, they may choose not to carry life insurance if they no longer have dependents. 

However, keeping life insurance can be a great way to supplement retirement income, and many people choose to keep paying for a permanent life insurance policy in the following situations: 

• People with lifelong dependents. Examples would be people with chronic illnesses or disabilities who require life-long care. 
• People who want their loved ones to have extra funds. Even though they may not need the money, customers may want to make sure that their loved ones have plenty of funds for unexpected bills in the future. 
• People who have high net worths. If people have already maxed out their retirement savings, they can start adding money to a life insurance policy’s cash value component. 

You should consider life insurance retirement planning if you want to supplement your retirement savings and have the added bonus of taking care of your loved ones financially if you should pass away unexpectedly.

Cost of Investing in a LIRP 

The cost of investing in a life insurance retirement plan varies. While types of term life insurance are cheaper than permanent life insurance plans, they don’t come with a cash value component to withdraw from in retirement. 

The cost of life insurance can vary greatly depending on your age, health, and choice of plan. The older you are when you purchase a life insurance policy, the more expensive it will be. 

Your life insurance quotes are always free.

 Secured with SHA-256 Encryption

Life Insurance Retirement Plans vs. IRAs and 401(k) plans 

We want to stress that a life insurance retirement plan shouldn’t be a replacement for an IRA or 401(k) but rather a supplemental retirement plan. LIRPs have more limited options for investment and lower return rates than IRAs and 401(k) plans. 

These retirement plans are:

• A 401(k) is a retirement plan that employers offer, and most companies will match some or all of the amount that employees contribute to their 401(k). 
• An IRA is a retirement savings plan that you can open on your own outside your employer and is ideal for contractors or self-employed individuals. 

Some qualities are the same among the three, but there are significant differences. For example, IRAs and 401(k) plans have set contribution limits, while LIRPs vary depending on the insurance company. Withdrawal taxes and how you can contribute also vary among the plans. 

Learn more about the differences between 401(k) plans and universal life insurance to determine how each can fit into your retirement plan.

Pros and Cons of Life for Insurance Retirement 

Are life insurance retirement plans right for you? Weighing all the pros and cons can help you decide whether to buy life insurance in retirement plans or stick to traditional retirement savings plans. 

Some of the pros of a life insurance retirement plan are as follows: 

• Guaranteed death benefit for beneficiaries
• Tax-deferred cash value component
• Supplemental income for retirement

Of course, there are also some cons to a life insurance retirement plan. Some of the main cons are:

• Lower investment returns on the cash value component
• Withdrawing money reduces your death benefit
• Contributions to the cash value component aren’t tax deductible

Remember, life insurance retirement plans aren’t meant to be the sole provider of retirement income, which means there are more drawbacks to these plans than to traditional retirement saving plans. 

Is whole life insurance a good retirement investment? 

Whole life insurance is a form of permanent life insurance, meaning it lasts the duration of your life as long as you pay your premiums. It can be a good investment if you want the bonus of a cash value component in addition to life insurance coverage. 

If you have maxed out your retirement plans and want an additional method to put money into, investing in a whole life insurance retirement policy may be worth it. 

Case Studies: Illustrating the Use of Life Insurance Retirement Plans (LIRPs)

Case Study 1: John’s Supplemental Retirement Income

John, a 55-year-old individual, has been contributing to a permanent life insurance policy with a cash value component for the past 20 years. He plans to retire at the age of 65 and wants to use the cash value of his policy to supplement his retirement income. By making additional premium payments, John has accumulated a substantial cash value that can provide him with a steady stream of income during retirement.

Case Study 2: Sarah’s Long-Term Care Coverage

Sarah, a 63-year-old woman, has a life insurance retirement plan that includes a long-term care rider. She added this rider to her policy to ensure financial protection in case she needs to cover the costs of long-term care in the future. The rider allows Sarah to access a portion of the death benefits early to pay for long-term care expenses, such as nursing home costs or medical bills related to age-related issues.

Case Study 3: Mark’s Supplemental Retirement Savings

Mark, a 40-year-old professional, wants to boost his retirement savings beyond what his traditional IRA and 401(k) plans can offer. He decides to invest in a life insurance retirement plan to take advantage of the cash value growth and tax-deferred benefits. Mark plans to make extra premium payments to maximize the cash value component and intends to use it as supplemental income during retirement.

Your life insurance quotes are always free.

 Secured with SHA-256 Encryption

The Final Word on Life Insurance Retirement Plans 

Life insurance retirement plans can be a great way to combine a retirement savings account with a life insurance policy. However, you should never depend on a life insurance in retirement plan as your only source of retirement income — the return on investment is low compared to IRAs and 401(k) plans. 

If you want to start shopping for a life insurance policy with a cash value component today, we recommend comparing quotes from different companies. Use our free quote comparison tool to find the best life insurance rates for your age and medical history.

Your life insurance quotes are always free.

 Secured with SHA-256 Encryption