Life Insurance Retirement Plans (LIRP): What They Are and How They Work (2024)

FAQs

Life Insurance Retirement Plans (LIRP): What They Are and How They Work? ›

A life insurance retirement plan is a permanent type of life insurance policy that builds cash value and provides a death benefit. Common LIRPs include whole life and universal life policies. As you pay the premiums for an LIPR, part of that premium is placed into a savings account, known as the cash value.

LIRP means life insurance retirement plan and is not meant to replace a standard retirement plan, like an IRA or 401(k). ². When someone is considering a life insurance retirement plan or LIRP, they are usually referencing a permanent life insurance plan. The two life insurance terms can be used interchangeably.

A 401(k) is a tax-advantaged retirement plan that is set up and managed by an employer. Basically, you put money into the 401(k) where it can be invested and potentially grow tax free over time. In most cases, you choose how much money you want to contribute to your 401(k) based on a percentage of your income.

Using life insurance for retirement income

As the Simple Dollar explains, the cash-value account grows over time and can be withdrawn as a source of income in retirement. And provided the amount withdrawn doesn't exceed the amount you've paid in premiums, it's not subject to taxes either.

A 401(k) typically provides employer-matching contributions, which can significantly boost your retirement savings. LIRPs do not have this feature. Contribution limits. The IRS sets annual contribution limits for 401(k)s—$22,500 for 2023—while LIRPs do not have this restriction.

LIRPs are more versatile than more traditional retirement savings options because of their dual roles of distributing both death benefits and building retirement income. And like a Roth IRA, they allow tax-deferred cash gains and tax-free withdrawals after age 59 and a half.

If you have a permanent life insurance policy that has accumulated cash value, then yes, you can take cash out before your death.

Traditionally, these plans pay the retiree monthly annuity payments that continue for life. Plans may offer other payment options. The retiree may transfer the account balance into an individual retirement account (IRA) from which the retiree withdraws money, or may receive it as a lump sum payment.

The 3% rule in retirement says you can withdraw 3% of your retirement savings a year and avoid running out of money. Historically, retirement planners recommended withdrawing 4% per year (the 4% rule).

Do I lose my life insurance when I retire? ›

If you had life insurance through work, you lose that coverage. Your group plan may let you switch the policy to your own individual plan, though the cost could be higher than what you were paying as an employee. 8 If you own life insurance outside of work, retiring will not change the coverage or the cost.

Depending on the insurer, a life insurance payout can typically be distributed in three ways: in the form of a lump sum, via a life insurance annuity, or through a retained asset account.

Some life insurance policies, like a life insurance retirement plan (LIRP), can also help you save for retirement. However, a 401(k) typically makes more sense as your primary retirement income because it's more affordable and offers better returns than a LIRP or other types of life insurance.

Life insurance is great for estate planning, while a Roth IRA is best for retirement savings. Regarding safeguarding your retirement years, two popular options often come into play: Roth IRA and life insurance. A Roth IRA is usually better for a retirement plan, offering potentially higher returns and tax-free growth.

While whole life insurance offers fixed, guaranteed returns on your cash value, you may earn higher returns with other investments, such as stocks, bonds and real estate.

LIRPs have been around since 1986, but many people still don't know how beneficial they can be.

Taking an early 401(k) withdrawal is extremely costly, so it should only be used as a last resort. The only time you should consider cashing out a 401(k) is to avoid bankruptcy or foreclosure. Unless you're 59 1/2 or older, your withdrawal will most likely be taxed at your regular tax rate and come with a 10% penalty.