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What Is a Life Insurance Retirement Plan?

What Is a Life Insurance Retirement Plan?

The majority of people look forward to the time in life when they no longer have to get up in the morning and report to a job. Once many people reach their 50s and 60s, they can enjoy retirement by spending time traveling, hanging out with grandchildren, and just relaxing. For many people, retirement is an easy transition as they have been planning for it for about the last 40 years or so. There is an abundance of tools available to help with retirement planning. However, many people don’t realize that they can also use a life insurance policy as a tool for retirement planning.

Most people who plan for retirement funding rely on employer-provided retirement plans and IRAs or other accounts to hold retirement savings. Once the person reaches retirement age, they draw from these funds to provide consistent income after leaving the workforce. If you have a whole life insurance policy or another type of cash value life insurance plan, you may also use the policy’s cash value to supplement retirement income. This is known as a life insurance retirement plan or LIRP.

Life insurance is generally used as a safety net to provide financial assistance to family members and dependents should something happen to the policyholder. The death benefit from a policy can be used to pay off debts, cover final expenses, meet financial obligations, or provide supplemental income to the surviving spouse or other beneficiaries. However, with a whole life insurance policy, it can also be used as an investment opportunity once there is no longer a need for a death benefit. Let’s take a closer look at LIRP insurance.

What is an LIRP?


A life insurance retirement plan (LIRP) is a permanent life insurance policy that uses the cash value option of the plan to help provide retirement funds. LIRPs are similar to a Roth IRA in that you don’t have to pay taxes on any withdrawals you make after you turn 59-and-a-half years old, and your cash gains are tax-deferred. Any permanent life insurance that has cash value, such as whole life insurance, may be used to help supplement retirement funds. However, term life insurance policies do not build cash value and cannot be used as a LIRP.

With your LIRP, your cash value becomes the source of your income. After you have had the policy long enough to accumulate a certain cash value, you can access the money by withdrawing it or taking a loan against it. You will then be able to use that money to provide tax-free income as a source of retirement funds.

How much money can you get from a LIRP?


As discussed, you can use the cash value of your permanent life insurance policy for retirement funds. Once you purchase the policy, a certain percentage of your monthly premiums is deposited into a tax-deferred investment account. The account is an investment-like savings account that accrues value over time. This growing amount is known as the cash value of your policy. The exact amount that is deposited into the savings account is determined by individual insurance companies and varies with each policy. The cash value will also be dependent on investment and interest rates over time.

How can you use LIRP funds?

LIRPs can be used to supplement your retirement income and bolster your retirement savings account. If you max out your investments to traditional investment plans, you can pay extra funds into your cash value to create additional tax-deferred investment growth. In times when the stock market faces a downturn, you might consider pulling from your cash value with a set rate of growth instead of a retirement account with a depreciated value.

Many people may not consider life insurance as a source of potential income. However, with a LIRP, you can use your policy to supplement your retirement and gain additional funds to support your lifestyle after you stop working.

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