Life Insurance Retirement Plans (LIRP) [2023]

quick Facts

  • The cash value component of a life insurance policy will have a lower return than a traditional retirement plan
  • Taking the money out of the cash value component will lower the amount of death benefit paid to beneficiaries
  • You should not only rely on a life insurance retirement plan to fund your retirement, but instead, use it to supplement your retirement.

It’s never too early to start thinking about retirement. The earlier you start saving, the more money you’ll have in retirement. If you are looking into life insurance policies, you may have heard of Life Insurance Retirement Plans (LIRPs).

some Permanent life insurance It contains an element of monetary value that grows over time. You can often withdraw money from this cash value component without penalty in most policies. The only catch is that the beneficiaries will not receive the same amount of death benefit.

Life insurance policies aren’t always the best for relying on retirement savings either, because the cash value growth rate isn’t as high as other retirement savings. Keep reading to learn all about the pros and cons of life insurance retirement plans and how they compare to other retirement savings plans such as IRAs.

Explanation of life insurance retirement plans

LIRPs are term life insurance policies with a cash component. This means that as long as you continue to pay your premiums, the policy will cover you for the rest of your life.

After you reach a certain age, usually around 60, you have it 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 gains in cash value are tax deferred.

So you can use the money you withdraw from your cash value component or 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 factor into the cash value component. This cash value component works like an investment account, the money grows slowly over time and is tax-deferred.

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

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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 additional retirement income rather than relying solely on it.

Below, we’ve reviewed all of the important steps you must follow when working with retirement life insurance plans.

Pay more than the required installment payments

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

However, there are conditions for doing so. For example, if you put a lot of money into your cash value component beyond the limit set by the IRS, it will be transferred to a different type of savings account and subject to taxes.

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

Use the monetary value component

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

You should also only withdraw from the 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 savings plans to continue to grow.

Add a long-term care passenger

Some life insurance policies allow you to add a long-term care rider to your plan. Some death benefits will pay early if you need money for long-term care.

Examples would be if you need to go to a nursing home or have high medical costs to pay due to age-related issues. Read our article on Understanding long-term care insurance Learn more about adding this rider.

Who should get a life insurance retirement plan?

Generally, people take out life insurance to make sure that their loved ones are taken care of. If they die unexpectedly while paying off the mortgage or sending their children to school, life insurance ensures that they are not burdened financially. As people get older, they may choose not to carry life insurance if they no longer have dependents.

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

  • People with lifelong dependents. An example is people with chronic illnesses or disabilities who require lifelong care.
  • People who want their loved ones to get extra money. Although they may not need the money, clients may want to ensure that their loved ones have plenty of funds for unexpected bills in the future.
  • People with high net worth. If people have already maxed out their retirement savings, they can start adding money to the cash value component of a life insurance policy.

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 die unexpectedly.

The cost of investing in LIRP

The cost of investing in a life insurance retirement plan varies. while Types of life insurance Cheaper than permanent life insurance plans, it doesn’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 plan selection. The older you get when you purchase a life insurance policy, the more expensive it will be to insure it.

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Life Insurance Retirement Plans vs. Dedicated Life Insurance Retirement Plans and 401(k) Plans

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

These retirement plans are:

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

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

Learn more about Differences between 401(k) plans and universal life insurance To determine how each of them might fit into your retirement plan.

The pros and cons of life 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.

Here are some of the pros of a life insurance retirement plan:

  • Guaranteed death compensation for beneficiaries
  • The tax-deferred cash value component
  • Additional retirement income

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

  • Lower investment returns on the cash value component
  • Withdrawing money reduces the death benefit
  • Contributions to the cash value component are not tax deductible

Remember that life insurance retirement plans are not intended to be the sole provider of retirement income, which means that there are more drawbacks to these plans than traditional retirement savings plans.

Is whole life insurance a good retirement investment?

Term insurance is a form of permanent life insurance, which means that it lasts your whole life as long as you pay your premiums. It can be a good investment if you want to reward the cash value component as well as life insurance coverage.

If you’ve maxed out your retirement plans and want an extra way to put money in, investing in a whole life insurance retirement policy may be worth it.

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 rely on retirement plan life insurance as your sole 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 price comparison tool to find the best life insurance rates for your age and medical history.

Frequently Asked Questions

What are life insurance retirement plans?

A life insurance retirement plan is a permanent life insurance policy that comes with a cash value component. You can withdraw money or borrow cash value to help fund your retirement. Keep in mind that withdrawals will reduce the amount your death benefit beneficiaries will receive after you pass.

What is the difference between life insurance retirement plans and retirement plans and 401(k) plans?

LIRPs are not only meant for retirement, they contain an element of cash value that you can use for additional income if needed. IRAs and 401(k) plans have higher investment returns and are only intended for retirement purposes.

Can I use life insurance as a retirement plan?

You can use the cash value component of a permanent life insurance policy to supplement your retirement income, but you should not rely on a life insurance policy for retirement. While you can use some of the money while you’re still alive, life insurance policies are meant to take care of your beneficiaries after you pass, not support your retirement.

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Editorial Tips: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective third party source for all things life insurance. We update our website regularly, and all content is reviewed by life insurance experts.

Rachel Brennan has been in the insurance industry since 2006 when she started working as a licensed insurance representative for 21st Century Insurance, during which time she held her property and casualty license in all 50 states. Several years later, she expanded her expertise in the insurance field, earning a license in health insurance and AD&D insurance as well. I worked for a small health in…

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Rachel Brennan
Licensed insurance agent
Rachel Brennan

Benjamin Carr was a licensed insurance agent in Georgia with two years of experience in life, health and property and casualty insurance. He has worked with State Farm and other risk management firms. He is also a strategy writer and editor with a background in branding, marketing, and quality assurance. He’s been in military newsrooms – literally on the front lines of journalism.

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It has been previously reviewed

Benji Carr

Previously Licensed Life Insurance Agent

Benji Carr

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