Cassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Cassidy Horton Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Written By Cassidy Horton Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Cassidy Horton Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Personal Finance Reviewer and Writer Doug Whiteman Personal Finance EditorDoug Whiteman is an award-winning journalist with three decades of experience covering personal finance, starting when he was the Washington, D.C.-based consumer news editor and reporter for Associated Press Radio in the 1990s and early 2000s. He's p.
Doug Whiteman Personal Finance EditorDoug Whiteman is an award-winning journalist with three decades of experience covering personal finance, starting when he was the Washington, D.C.-based consumer news editor and reporter for Associated Press Radio in the 1990s and early 2000s. He's p.
Doug Whiteman Personal Finance EditorDoug Whiteman is an award-winning journalist with three decades of experience covering personal finance, starting when he was the Washington, D.C.-based consumer news editor and reporter for Associated Press Radio in the 1990s and early 2000s. He's p.
Doug Whiteman Personal Finance EditorDoug Whiteman is an award-winning journalist with three decades of experience covering personal finance, starting when he was the Washington, D.C.-based consumer news editor and reporter for Associated Press Radio in the 1990s and early 2000s. He's p.
| Personal Finance Editor
Updated: Aug 29, 2023, 9:42am
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A life insurance retirement plan offers the benefits of life insurance plus the security of retirement savings. An LIRP won’t fully replace your IRA or 401(k), but it can be used as a supplement to your current retirement planning strategy.
A life insurance retirement plan is a permanent life insurance policy, such as universal life insurance, that combines life insurance coverage with a “cash value” component that you can dip into for retirement money (or anything else you like). LIRPs can’t be term life insurance because term life has no cash value component.
One of the main benefits of an LIRP is its tax advantages. The cash value grows tax-deferred, so you don’t owe taxes on any gains until you withdraw them. Additionally, some policy loans and withdrawals may be tax-free as long as they don’t exceed the amount of money you’ve paid in premiums.
With an LIRP, you pay premiums into a life insurance policy, which builds up cash value over time. The cash value can be withdrawn or borrowed against:
When you pass away, the death benefit of the policy is paid out tax-free to your beneficiaries, but the death benefit will be reduced by the amount of any withdrawals you took and policy loans that weren’t paid back. However, if your primary goal with an LIRP is to use the cash value, you may not be concerned about the death benefit amount.
LIRPs are essentially “overfunded” policies, meaning you can pay in more money than is required to maintain the death benefit. This excess allows the policy to accumulate cash value more quickly, which can increase the tax-free income stream available during retirement.
Life insurance policy loans are a key benefit of having an LIRP. As your policy’s cash value grows, you can borrow from it to supplement your retirement income—even before age 59½. The process is relatively simple:
Withdrawals are another option for accessing your LIRP’s cash value. Before you turn 59½, you can withdraw money tax-free up to the basis. Withdrawal amounts above the basis are taxable.
After age 59½, withdrawals are not taxable.
Say you start an LIRP at age 30. By the time you reach 65, you’ve paid a total of $175,000 in premiums, and your cash value account has grown to $700,000 due to the investment gains.
Withdrawals will be tax-free in retirement. Before age 59½, you can withdraw money without paying taxes on the first $175,000—the premiums you’ve paid. If you take out more than $175,000, that portion is taxable.
An LIRP can be a useful tool for retirement planning, but it’s important to carefully consider the pros and cons before making a decision.
Tax-free income in retirement Higher premiums and fees Tax-free death benefit for beneficiaries Not a standalone retirement solution No contribution limits Withdrawals and unpaid loans reduce the death benefit No required minimum distributions (RMDs) Potential for policy lapse if cash value drops below a certain minimum Guaranteed return rates on cash value with some policies Substantial amount of cash value needed to generate tax-free income See More See LessWhat you’ll pay for an LIRP depends on these factors.
LIRPs are not a replacement for 401(k)s and IRAs. But they can be used in conjunction with the retirement plans, which work differently.
Here’s how a 401(k) plan compares to an LIRP.
A life insurance retirement plan blends life insurance with potential cash value growth, while an individual retirement account is purely an investment account. Here’s a closer look at how they compare.
A life insurance retirement plan may make sense if any of these situations apply to you:
You can find life insurance retirement plans at any company that sells cash value life insurance policies. If you’re interested in an LIRP, compare plans to find the one that best fits your needs. Talk to an insurance agent if you need help narrowing down your options.
Companies that offer LIRPs include:
There are multiple ways to save for retirement, so consider these alternatives to a life insurance retirement plan.
There are two primary types of individual retirement accounts that can help you save and grow money for retirement. With a traditional IRA, your contributions lower your taxable income today, and you don’t pay taxes on the money until you withdraw it in retirement. With a Roth IRA, you pay taxes on your contributions now and enjoy tax-free withdrawals in retirement.
If your employer offers a workplace retirement plan, such as a 401(k) or 403(b), it can be a great way to save for retirement. You contribute pre-tax dollars, which reduces your taxable income for the year. Many employers provide matching contributions, which can help you save even more.
If you have a high-deductible health plan, you may be eligible for a health savings account (HSA). Withdrawals are completely tax-free and penalty-free when used for qualified medical expenses. After age 65, you can withdraw money for any reason without penalty, but you may have to pay income tax.
If you’ve maxed out your tax-advantaged retirement accounts, you can still save for retirement in a taxable investing account. While you won’t get any tax benefits, you’ll have more flexibility in how you grow your money and when to withdraw it.
Annuities give retirees a guaranteed stream of income. You can purchase an annuity from an insurance company with a lump sum of money or a series of payments. Annuities come in several varieties, including fixed, variable and indexed options.
Yes, you can put money into an LIRP if you have a retirement account. In fact, LIRPs are often used by people who have maxed out their 401(k) or IRA but still want to continue saving for retirement and want the added bonus of having life insurance.
You may be subject to fees and life insurance surrender charges if you decide to surrender your LIRP. The amount you receive back will depend on the cash value of the policy and any outstanding loans or fees. Carefully review the terms of your plan and speak with a financial professional before canceling.
Life insurance is one of several ways to fund an early retirement. While permanent life insurance allows loans or withdrawals with no taxes unless they exceed your basis, other options like Roth IRAs, taxable brokerage accounts and 457(b) plans allow you to access funds without early withdrawal penalties. It’s crucial to explore these options with a CPA due to potential tax law changes and costly mistakes.
An LIRP can be a good way to supplement your retirement income, but it should not be your primary strategy. In most cases, you’re better off focusing on maxing out a 401(k) and IRA, and then using leftover money to fund an LIRP if you still wish to save.
There is no contribution limit for life insurance retirement plans, so you can technically contribute as much as you want. IRS tax code section 7702 sets limits on cash value life insurance policies. If they are too overfunded, they’ll become a modified endowment contract, which have different tax rules. Consult a financial advisor or other financial professional if you have questions about how much you should put in.
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Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying off $18,000 in debt within 10 months of graduating college. She later went on to triple her salary in two years by ditching her 8-to-5 job to write for a living.
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