Lauren Lewthwaite Last Updated On: August 9, 2023

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Understanding Life Insurance Retirement Plans, Made Easy

life insurance retirement plans

A life insurance retirement plan (LIRP) can help you retire more comfortably, but they’re not for everyone.

Life insurance retirement plans are an easy way to pad your retirement savings plans that can effectively help many people plan for a more comfortable life after the grind. LIRPs are part and parcel of cash value life insurance, like whole life insurance, and can offer flexibility as well as tax advantages for people financially planning for retirement. 

However, while these plans are good for some, for most people, a 401(k) or individual retirement account (IRA) will be a better option. 

Let’s look into the benefits of LIRP retirement plans, and see how they stack up against other popular options so you can make the best decision for you.

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Life Insurance Retirement Plans: What You Need to Know

Life insurance retirement plan is a type of permanent life insurance that comes with a cash value component that can help fund your retirement. 

Much like a Roth IRA, LIRPs allow you to defer tax gains and not pay taxes on withdrawals after you’re 59 1/2 years old. Obviously, these are some serious perks of LIRPs, and ones that can benefit certain people. Namely, higher income people. 

But more on that in a minute. Let’s sort out what is meant by “cash value” when it comes to life insurance policies.

What's Cash Value?

Cash value is the percentage of your cash value life insurance policy that is put into a tax-deferred investment account. How much is put into the account varies based on policy, but the point is to watch your money grow.

Once you’ve had the account for long enough, or earned a certain amount, you can withdraw the money or take out a loan against it. That money can then be used to enjoy tax free retirement income. 

Pretty nifty, right?

Sure, but there’s a catch. (Surprise, surprise!) If you withdraw your cash value and pass away before you can pay it back, your beneficiaries won’t get as much money, because some of that benefit will go toward paying back what you took out. 

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How LIRPs Can Balance Out Stock Market Fluctuations

Many people use life insurance retirement plans to not only boost retirement savings, but to provide a cushion in the event of a downturn in the stock market. 

All you have to do is maximize your contributions to your usual investment accounts, then pay extra money into your LIRP, which will effectively create another avenue for investment growth that’s tax-deferred.

If the stock market crashes, it can be way more beneficial to take money from your LIRP with a preset growth rate than to pull money from a retirement account that’s suffering through depreciated value. 

Why LIRPs Are Most Suited to High Income Earners

Remember what we said about life insurance retirement plans being best suited to people who earn a higher income? If you can’t see why already, we’ll make it clear: you need extra money to even consider investing. Many Americans struggle to pay basic bills, and there’s no money left over to put into this sort of policy.

And that’s the thing: to build up enough funds to really supplement retirement, many LIRP policyholders overfund their accounts, putting in more than the monthly premium. 

That extra cash will go straight into the LIRPs cash value and will grow, tax deferred. 

Still, a word of warning: this tactic will only work if you aren’t pressed to make withdrawals before you’re 59 1/2. LIRPs that are overfunded and exceed the annual premium limit established by the IRS will be converted to a modified endowment contract. As a modified endowment contract, your funds are subject to additional penalties and taxes for withdrawals.

How to Use LIRP Plans to Your Benefit in Retirement

Like most financial experts, we recommend adhering to the 4% rule—so don’t withdraw more than 4% of your savings every year of your retirement. 

You can use your LIRP plan in addition to your retirement savings to be intentional about how and where you spend money, and how you manage money.

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So, Should You Consider a LIRP Plan?

That depends. If you will still need insurance coverage when you retire, people you have dependents, or if you are an individual with a high-net worth and have tapped out your contribution limits to other accounts for retirement, then you should definitely consider a LIRP. Life insurance retirement plans can support you and your dependents after retirements (and after you’re gone), while providing an additional vehicle for savings that are tax deferred. 

Get free quotes for life insurance retirement plans here. 

But life insurance retirement plans are more niche than most types of policies and the vast majority of people will not need them or benefit from them, before or after retirement.

For these individuals, an IRA or 401(k) is far more sensible—and affordable.

What's an IRA and 401(k)?

An IRA is a simple retirement savings account that you open and fund yourself. You can use this alone or in addition for a 401(k).

A 401(k) is offered by employers to employees and the employer will usually match the employees contributions to their plan. 

How Much Does Investing in a LIRP Cost

Life insurance retirement plans cost more.  For instance, the monthly premium of term life insurance and a 401(k) or Roth IRA is around $25/month. Permanent and LIRP policies cost around $570/month.

That’s a huge difference, and like we said, life insurance retirement plans simply aren’t going to be worth it for most people.

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The Takeaway: Life Insurance Retirement Plan

Retirement planning is an invariably important part of your financial future, and learning how to do it sensibly is a crucial part of financial literacy. Whether or not you decide to get a life insurance retirement plan is secondary to the fact that you’ve learned about them, and can either embrace this type of policy as something that is likely to enhance your life, or put it aside as a policy that’s not for you. 

Ultimately, the best life insurance retirement plan is the one you can actually commit to. If it doesn’t fit your budget or your life, then opt for retirement savings avenues that do. The fact remains that if you want to retire comfortably, the sooner you start looking into your options and setting money aside, the better. 

Lauren Lewthwaite Lauren Lewthwaite has been freelance writing for almost five years writing content that ranges from health to insurance and everything in between. Lauren is also a trained translator in French and English and is a dog-mom to an adorable Australian Shepherd.

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