According to USA Today’s 2023 data, most Americans believe they must save $1.8 million for retirement. However, only 37% of the working population thinks they’ll be able to achieve this amount. This growing concern about financial security in retirement has led many to explore alternative strategies. One such option is the life insurance retirement plan (LIRP), which offers a unique approach to supplementing retirement income.
What Is a Life Insurance Retirement Plan?
A life insurance retirement plan (LIRP) is a permanent life insurance policy with a cash value component that accumulates savings over time.
Permanent life insurance lasts a lifetime and includes a standard death benefit. However, it’s important to note that a LIRP must not replace a standard retirement plan.
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How Does a Life Insurance Retirement Plan Work?
A LIRP functions by combining life insurance coverage with a savings component. Policyholders pay premiums, a portion of which goes into a cash value account that grows over time.
Borrow and Withdrawal
Policyholders can take out loans against the cash value savings account of their LIRP, which may be beneficial for significant purchases later, such as helping raise a child or funding education.
In certain emergency situations, direct withdrawals from the cash value savings account may be possible. However, this isn’t always an option, so it’s advisable to review the specific LIRPs under consideration thoroughly.
Death Benefit
A LIRP pays beneficiaries upon the insured’s death, offering financial support. This benefit can be used to settle debts, cover funeral expenses, or pay estate taxes. Also, you can structure this to bypass probate, ensuring immediate liquidity.
You Can Pay More Than the Minimum
You can overfund, or pay more than the minimum, in a life insurance retirement plan. In doing so, the cash value can grow more rapidly, providing a stronger financial foundation for the future.
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Types of Life Insurance Retirement Plans
LIRPs can be structured through the following types of permanent life insurance policies:
Whole Life Insurance
Whole life insurance offers policyholders a fixed death benefit and a constant premium. Each premium payment contributes to the cash value account, which grows based on the policy’s terms.
This option is suitable for those seeking a straightforward policy with cash value accumulation.
Universal Life Insurance
Universal life insurance also allocates a portion of the premium to build cash value. These policies offer more flexibility than whole life insurance but come with slightly higher risk.
Some policies allow for an increase in the death benefit following a physical exam and may permit adjustments to premium payments based on the cash value balance.
However, depleting the cash balance through insurance costs and other charges can lead to policy lapse and loss of coverage.
This option is ideal for those who desire the ability to increase their death benefit later in life, especially if their income fluctuates.
Variable Life Insurance
Variable life insurance enables investment of the cash value account in various options like stocks, bonds, and mutual funds.
This investment feature introduces higher risk, as the policy’s cash value will fluctuate with market performance. Therefore, significant decreases in the cash account’s value can reduce the death benefit.
This policy suits individuals purchasing a policy before retirement who can tolerate market volatility to enhance long-term investments.
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How Much Does a Life Insurance Retirement Plan Cost?
The cost of a life insurance retirement plan varies based on several factors, including:
- Age: Older individuals typically pay higher premiums.
- Health Status: Preexisting health conditions can lead to increased premiums.
- Policy Type: Different life insurance policies come with varying costs.
- Coverage Amount: Higher coverage amounts generally result in higher premiums.
- Retirement Goals: Specific retirement objectives can influence the policy structure and cost.
- Financial Assets: Existing retirement accounts and assets may impact the necessity and cost of a LIRP.
Additional costs may include administration, management, and other fees. Some LIRPs impose a fee if the plan is canceled within the first five years.
Failure to maintain premium payments can result in fees, penalties, or policy cancellations, which can be especially difficult for those dealing with low-income budgeting.
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Why Should You Have a Life Insurance Retirement Plan?
A LIRP can offer the following benefits that complement traditional retirement planning:
Provides Additional Income for Retirement Savings
A LIRP supplements income gaps not covered by your Social Security or pensions. It offers flexible withdrawal options for emergencies or planned expenses and reduces reliance on traditional investment accounts during market downturns.
It can be a wise choice for those who want to save or invest outside the conventional retirement systems.
Tax Advantages
Tax-Deferred Growth
Cash value growth isn’t taxed annually, allowing for compounding without tax drag. This feature is ideal for long-term wealth accumulation.
Potential for Tax-Free Income
Income drawn via policy loans is often tax-free if appropriately managed. This strategy can help avoid income thresholds that trigger Social Security taxes and assist in managing taxable income levels in retirement.
Flexibility
Flexible Premium Payments
Policyholders can adjust payment frequency to monthly, quarterly, or annual schedules. You can increase or decrease contributions as income changes and pause or resume contributions during financial hardships.
Provide Opportunity for Diversification
A LIRP adds a non-market correlated asset to your portfolio, providing protection against stock and bond market volatility. This diversification helps reduce overall portfolio risk while supporting growth.
Life Insurance Retirement Plans Provide Protection for Loved Ones
A LIRP ensures financial security for the family in the event of unexpected death.
Because of the death benefit, it covers end-of-life costs and outstanding debts and creates a financial legacy for future generations, including support for divorced or separated individuals managing shared responsibilities.
Can Be Used for Estate Planning
Proper structuring helps reduce estate taxes. A LIRP can fund irrevocable life insurance trusts (ILITs) and simplify inheritance, providing liquidity to heirs through mechanisms like a fiduciary bond.
Guaranteed Returns
Some policies offer guaranteed minimum interest rates, providing predictable growth regardless of market performance.
This feature can reduce risk while still building cash value, which is especially attractive for empty nesters nearing retirement.
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When to Consider a Life Insurance Retirement Plan
It’s best to consider LIRPs when you’re one of the following:
If You’re a High-Income Earner
If you’re a high-income earner who has already maxed out retirement contributions to a 401(k) or IRA, a LIRP can offer an additional path for tax-advantaged growth.
This plan allows you to build supplemental retirement income without being restricted by the contribution limits that apply to traditional retirement accounts.
When You Want to Start Retirement Planning Early
Starting early allows you to build long-term cash value and supplement retirement income down the line.
The earlier you fund a policy, the more time interest and investment gains have to compound, which can result in stronger policy performance.
If You Have Children With Functional Needs
LIRPs can help ensure lifelong financial support and security for dependents who rely on your care, such as children with functional needs.
In some cases, you can structure these policies to provide long-term income or estate planning benefits tailored to their lifetime care.
When Not to Consider a Life Insurance Retirement Plan
When You Have Budget Constraints
If your financial resources are limited, the cost of premiums may outweigh the benefits of a LIRP. It might be wiser to focus on debt repayment or a debt management plan first.
If You Can’t Consistently Contribute to Traditional Retirement Plans
It’s advisable to prioritize maximizing your existing retirement accounts before considering additional vehicles.
If you’re not contributing regularly to a 401(k) or IRA, adding another long-term policy may stretch your budget without guaranteed returns.
When You Need an Affordable Term Coverage
If your main goal is short-term protection at a lower cost, term life insurance may be a more suitable option.
Term life insurance policies also offer straightforward death benefits without the added complexity or higher premiums of permanent insurance.
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What to Consider Before Committing to a Life Insurance Retirement Plan
Before committing to a policy, here are the following considerations to keep in mind:
Your Financial Situation and Goals
Income Level
Your income needs to support recurring premium payments without affecting your other responsibilities. If your income is irregular or you’re living paycheck to paycheck, prioritizing a LIRP can backfire over time.
Disposable Income
Evaluate how much money you can allocate after covering necessary living expenses and other financial commitments. A LIRP works better when you can consistently contribute beyond the minimum, after trimming unnecessary costs.
Retirement Goals
If you’re planning for early retirement, leaving a legacy, or minimizing your tax exposure in later years, a LIRP might complement your strategy. Make sure it supports the structure you’re already building.
Risk Tolerance
Your comfort level with financial risk is crucial in selecting the type of policy. Some offer fixed returns, while others depend on market performance. Choose one that matches how you handle volatility and uncertainty.
Policy Type and Design
Difference Between Policies
Since each policy has its own structure, performance model, and risk level, it is vital to understand the distinctions between whole, universal, and variable life policies.
For example, whole life policies offer fixed premiums and guaranteed growth, while variable life policies let you invest in short-term investments tied to the market, which can lead to higher returns, but also higher risk.
Whichever you choose will depend on your lifestyle, commitment, and ability to make premium payments.
Policy Structures
Not all LIRPs operate the same. Some offer predictable growth and fixed costs, while others offer flexibility but require more oversight.
So, evaluate the conditions, such as how the policy credits interest, charges fees, handles premium flexibility, and supports your long-term retirement goals, before committing.
Long-Term Commitment
LIRPs take time to build cash value. If you expect to cancel early or stop funding it mid-way, you may face penalties or have little value. Remember, entering a policy without considering the commitment can be costly.
Costs and Fees
Factor in every fee: administration, asset management, early surrender, and loan interest. These expenses affect how quickly your policy accumulates value. Additionally, many policies don’t disclose all charges upfront, so ask for a full breakdown.
Tax Implications
If mishandled, withdrawals or loans from LIRPs can trigger taxes. If the policy lapses while a loan is unpaid, the IRS may treat it as taxable income.
Moreover, accessing funds can influence Medicare premiums or create income counts that push you into a higher tax tier. So, you must review how each transaction affects your present and future taxable income.
Consult a Financial Advisor
A certified financial advisor can evaluate your current economic structure, recommend policy types, and project outcomes based on your inputs.
A good advisor will stress-test your plan against life changes and make adjustments along the way. This is why it’s advisable not to rely solely on insurer-provided simulations.
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Alternatives to Life Insurance Retirement Plans
LIRPs can be beneficial, but they aren’t the only route. Depending on your goals and available resources, the following options might offer better flexibility, lower cost, or faster growth.
Individual Retirement Accounts (IRAs)
IRAs are accessible, well-regulated tools for retirement savings. They offer control over investment strategy and, depending on the account type, provide notable tax benefits.
Traditional IRAs
Traditional IRAs generally allow tax-deductible contributions. The investments inside the account grow tax-deferred, meaning you’ll pay taxes only when you withdraw.
Starting at age 73, the IRS requires annual withdrawals, called required minimum distributions (RMDs).
Roth IRAs
Roth IRAs differ in that you contribute post-tax dollars. Withdrawals in retirement are tax-free, provided you meet the rules.
Also, Roth IRAs don’t require withdrawals during the account holder’s lifetime, which supports long-term planning.
SEP IRAs
Designed for the self-employed, such as freelancers, side hustlers, or small business owners, SEP IRAs allow for higher contribution limits than personal IRAs.
They simplify planning since only employers contribute, and they scale with business profits.
Company-Sponsored Retirement Plans
Company-sponsored retirement plans include 401(k), 403(b), and similar structures. Typically, employers match your contributions, which accelerates growth.
As a result, contributions reduce taxable income, and the funds grow tax-deferred until withdrawn.
Investments
Investments let you build wealth outside of retirement accounts. They can also offer greater flexibility and potential for high returns depending on market choices and volatility.
Your investment options are as follows:
Stocks
Buying shares in public companies offers growth through dividends and appreciation. Stocks are volatile but have historically outperformed most other long-term investments.
Bonds
Bonds provide interest income and tend to be more stable than stocks. They suit investors who prioritize consistent returns and lower risk.
However, government and corporate bonds each have their own risk and return profiles.
Commodities
Gold, silver, oil, and agricultural products help hedge against inflation. Unlike stocks and bonds, their prices move differently, but they also carry volatility.
It is recommended that these investments be used carefully and as part of a broader portfolio mix.
Real Estate
Rental properties can generate passive income and increase in value. They offer tax deductions, including depreciation and interest.
Whether you rent or lease out a property, understanding your obligations as a primary leaseholder is crucial.
In some cases, you may enter into a sublease agreement or choose to sublet part of the property to reduce costs or generate additional income.
However, they require significant time, effort, and initial funding to grow and manage correctly.
Start or Invest in a Private Business
Starting or buying into a business offers potential for significant returns. This approach lets you control the outcome more than public markets, but it carries higher risk and lower liquidity.
If you choose this route, you must evaluate this option based on the type of entity, your expertise, and available capital.
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Other Alternatives to Life Insurance Retirement Plans
Other insurance-based solutions may better serve your needs if your focus is income protection or long-term care rather than cash accumulation.
Long-Term Care Insurance
Long-term care policy pays for services such as assisted living, home care, or nursing facilities. You’ll usually purchase this before retirement in your 50s or 60s. It also helps prevent medical expenses from draining other retirement savings.
Annuities
Annuities, such as hybrid annuities, straight life annuities, and qualified life annuity contracts (QLACs), convert a lump sum into guaranteed income for a fixed period or life.
You can start payments immediately or defer them. Some plans also return the remaining value to beneficiaries after death.
Income Protection Insurance
Income protection or disability insurance covers part of your income if an injury or illness prevents you from working. It provides stability during working years and ensures your retirement contributions aren’t interrupted.
Critical Illness Insurance
Critical illness insurance pays a lump sum when you are diagnosed with certain serious conditions like cancer or stroke. This policy helps offset treatment costs or supplement lost income.
At the same time, you can use this in tandem with regular health insurance.
Accidental Death and Dismemberment (AD&D)
AD&D insurance covers fatalities or severe injuries caused by accidents. It’s affordable and complements a primary life policy, offering extra protection in high-risk situations.
Prepaid Funeral Plans
Prepaid funeral plans lock in future funeral costs at today’s prices. They reduce financial and logistical stress for surviving family members and allow individuals to specify their final arrangements.
Other Retirement Planning Strategies
Beyond retirement plans, investments, and insurance-based options, you can also fund your retirement savings in the following ways:
- Self-Funding: If you prefer to keep your funds in liquid, taxable accounts, this option gives complete control but requires discipline in expense tracking.
- Health Savings Accounts (HSAs): HSAs grow tax-free and offer tax-free withdrawals when used for qualified costs. If paired with a high-deductible health plan, HSAs also let you save pre-tax dollars for medical expenses.
- Emergency Funds: Every plan needs a cash buffer. So, keeping three to six months of expenses in a liquid account protects your long-term strategy from being derailed by short-term surprises.
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Final Thoughts
A life insurance retirement plan can be a practical addition within a well-defined retirement framework.
However, this approach doesn’t suit every financial profile. It demands consistent funding, a clear planning horizon, and understanding how each policy component functions.
Before committing, it’s necessary to examine how the policy fits within your broader asset and income structure, including how it interacts with investment strategies, liquidity needs, and future obligations.
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