What is a Life Insurance Retirement Plan?

A Life Insurance Retirement Plan (LIRP) uses the tax benefits of a cash-value life insurance policy to supplement a retirement strategy that typically features products like IRAs and 401ks.

For those who are looking to supplement their retirement income and potentially reduce their tax burden, a Life Insurance Retirement Plan (LIRP) may be worth exploring. While a Life Insurance Retirement Plan (LIRP) may seem like a good way to reduce your tax burden, there are other options to consider.

How Do Life Insurance Retirement Plans Work?

Life insurance can be a viable tool for people who are looking to utilize all options for funding their retirement.

A life insurance retirement plan (LIRP) is a strategy that uses a permanent life insurance policy to provide a source of income during retirement. It is also known as a "tax-free retirement plan" because withdrawals are typically tax-free as long as certain conditions are met.

Unlike traditional retirement accounts, such as 401(k)s and IRAs, there are typically no contribution limits on a LIRP.

Setting up a permanent life insurance policy as part of a LIRP is a popular option for anyone looking to build large amounts of tax-advantaged cash within the life insurance policy that can be accessed during retirement. And because this is life insurance, buyers have the additional benefit of death benefit protection.

Policies that build cash value include whole life, universal life, fixed-indexed, and variable life insurance products.

The insurance company identifies either a fixed (whole life and guaranteed universal life policies) or variable (fixed-indexed, variable life, and variable universal life) rate of return when you buy the policy.

Accessing Cash

One way to use cash-value life insurance to supplement retirement income is by taking out loans against the policy. As the policyholder, you can borrow money from your policy's cash value, which is tax-free, and use it as additional income during retirement.

These loans do accrue interest, but you will essentially be repaying yourself.

If you choose not to borrow against the policy, you can surrender all or part of the policy for its cash value component. If you completely "cash out," this would end the policy and the death benefit, but you would receive a lump sum payment, free from income tax, that you can use for retirement expenses.

Who is a LIRP Best For?

People who are looking to take control of tax planning in retirement can find having cash-value life insurance advantageous.

LIRPs are typically most attractive to high-income earners who have maxed out their contributions to traditional retirement accounts, such as 401(k)s and IRAs and are looking for additional tax-advantaged ways to save for retirement.

Let's review the tax treatment of some typical retirement vehicles to see where, or if, a LIRP might fit.

Products where Gains are Taxable

Gains on money held within these products are counted as taxable income each year:

• Stocks
• CDs
• Checking accounts
• Savings accounts

Products Where Gains are Tax-Deferred

Taxes are deferred until money is withdrawn for the following products:

• Annuities
• 401ks
• IRAs
• SEP IRAs

Products Where Gains are Tax-Free

There are a handful of products that feature tax-free income. You pay no taxes when you distribute money from these vehicles:

• Cash value life insurance (LIRP products)
• Municipal bonds
• 529 plans
• Roth IRAs

Can You Use a LIRP to Fund Your Retirement?

There are many ways to reach your financial goals in retirement, and including a mix of products indicated above is a good strategy, especially if you are seeking to reduce the impact of taxes on your retirement savings.

But buying cash value life insurance as a singular strategy is generally not a good idea.

Diversification of products is always a good strategy. But having permanent life insurance plans in place, especially if you are heavily invested in taxable and/or tax-deferred investments, could be an important piece of your diversified financial planning puzzle.

Annuities can also be a very useful tool to help grow money tax-deferred. Fixed annuities, especially in a volatile equities market, are uniquely attractive in that the annual annuity interest rates are guaranteed for the period of time you select (typically 3, 5, or 7-year "lock-in" periods).

And, of course, having annuities as part of your overall retirement income strategy is a good idea since this is the only product that can provide guaranteed income in retirement.

Life Insurance Retirement Plans Vs. Annuities

As you plan for retirement, a LIRP can be a financial strategy that can pay dividends and reduce your overall tax burden. And LIRPs also have the side benefit of life insurance coverage. But these products fill a different role than annuities in your retirement.

Annuities are issued by life insurance companies but offer significantly different benefits than life insurance. Fixed annuities can be a great foundation for planning retirement income because they offer guaranteed returns that can stabilize the variability in your retirement portfolio.

In addition to guaranteed returns prior to retirement, annuities can be a source of income that you can't outlive!

Final Thoughts

LIRPs can be a valuable tool to reduce your tax burden and can add real dollars that you can spend in retirement versus handing it over to Uncle Sam. Having a LIRP as part of a diversified product portfolio could reap real benefits.

But having a fixed annuity plan is the only way to guarantee income in retirement.

Annuities allow you to choose monthly income for a period of time or for a lifetime. Annuities from Canvas Annuity feature fixed products with very attractive returns. And you can buy directly online or with the help of a friendly agent right over the phone.