Life Insurance Retirement Plan (LIRP): What You Need to Know

Selecting suitable savings options for your retirement can become truly overwhelming. A lot of people use a combination of different retirement plans to ensure the highest level of convenience. And one of the great additions to traditional retirement you may want to consider is a life insurance retirement plan. As opposed to some other plans, this one brings you both an opportunity to build your capital over the years and benefit from life insurance at the same time.

Let’s examine life insurance for retirement in detail: what it offers, its pros and cons, and how it compares to traditional IRA and 401(k) options.

Understanding LIRP: Basics of the Plan You Need to Know

So, what is a life insurance retirement plan? To put it simply, it is a type of plan that offers individuals an opportunity to make a monetary contribution to withdraw in retirement and enjoy permanent life insurance.

If we compare a LIRP to standard term life insurance, the plan includes cash value. This is not something you get with term insurance, and it makes it an attractive option for boosting your retirement.

LIRPs offer more versatility and flexibility than traditional retirement savings. You can start saving at any age, there are no contribution limits, and your cash gains are tax-deferred.

The way a life insurance retirement plan works is simple. When you sign up for this policy, you have to make premium payments at specific intervals. In this way, the cash value that you will get access to grows over the years. After you turn 59.5 years old, you can withdraw your accumulated cash tax-free for various purposes. Before you turn the age mentioned above, it’s possible to withdraw money tax-free, but with restrictions—not more than the overall amount of premiums you’ve already paid.

Some people may also be interested in the plan’s benefits in case of potential death. LIRPs envisage tax-free payments to beneficiaries after the policyholder’s death. However, the sum is reduced by the loans and withdrawal sums made by the individual.

Consider the Main Pros and Cons of LIRP

If you are considering life insurance saving for retirement, it’s crucial to be aware of its exact advantages and disadvantages.

Pros of choosing LIRPs

Here are some of the pros to keep in mind.

Absence of a limit on contributions

With a life insurance retirement plan, you won’t be limited in your contributions. If you have a high income and you want to make sure you have a comfortable retirement, you can make high contributions right away. This is different from IRA and 401(k) accounts that have exact contribution restrictions.

Deferred taxes for quicker cash value increase

With this plan, you can defer tax payments on the money you earn until you decide to withdraw them. As you can imagine, when taxes don’t immediately affect your cash value, it grows a lot quicker.

Payout for beneficiaries is included

As mentioned before, if an individual passes away, a LIRP ensures that their beneficiaries are paid the death benefit. This is a significant advantage for those worried about the future of their families.

Cons of Choosing LIRPs

Like anything else, choosing life insurance for retirement planning has some disadvantages. Here are the main ones.

Fees and slow cash value growth at the beginning

A plan of this type requires you to pay expenses and administrative fees. For the first few years, you shouldn’t expect the policy to build significant cash value thanks to the premiums you pay. It will take some time to see growth, as significant sums will go towards fees.

Deducted policy loan decreases death benefit

Remember that withdrawing money, particularly having an unpaid loan taken from the cash value, will reduce the death benefit for your beneficiaries.

Tax deductions are not applicable

A LIRP doesn’t allow you to enjoy the benefits of tax deductions, which is a disadvantage compared to a 401(k) account.

LIRPs vs. Traditional Retirement Plans

Even if you decide that a life insurance retirement plan is right for you, it cannot be viewed as a complete substitute for IRAs and 401(k)s. However, they can be effectively used together to achieve the best results.

LIRP vs. 401(k)

Now let’s compare a 401(k) and a LIRP to see what each one offers:

• Matched contributions. A strong advantage of a 401(k) compared to a LIRP is that your employer can match contributions you make to a plan. As a result, your savings increase significantly. With a LIRP, this is not something you can expect.
• Management approach. Another difference between the two is that a LIRP is set up individually while a 401(k) is mostly employer-managed. For many people, 401(k) seems like an easier option, as they don’t have to take steps on their own and can often be signed up automatically.
• Contribution restrictions. The area where life insurance retirement planning shines compared to a 401(k) is the absence of contribution limits. With 401(k)s, your annual limit is $23,000 as of 2024, while LIRPs don’t have this restriction.

LIRP vs. IRA

Another comparison you may be interested in is a LIRP and an IRA, so here’s what you should know:

• Mandatory withdrawals. The first advantage of a LIRP compared to an IRA is that when you retire, you are not required to make mandatory withdrawals. You have an opportunity to decide how long you want to keep your money in a LIRP, which is not possible with IRAs.
• Contribution limits. Similar to 401(k)s, the con of IRAs is that there is a contribution limit. In 2024, it will be $7,000 for those aged under 50 and $8,000 for individuals over 50. As stated previously, this is not an issue with a LIRP.
• Taxes. If we talk about Roth IRAs and LIRPs, they share the same advantage—if you make withdrawals after you turn 59.5, you don’t need to pay taxes on them. With traditional IRAs, on the other hand, your taxes are deferred until you start making withdrawals when you retire.

Conclusion

Numerous people choose life insurance with a retirement plan as an addition to traditional retirement options. This is not surprising, as those who want to save more get an opportunity to make bigger investments by using several plans. The advantages of a LIRP include the absence of contribution limits, death benefits, and deferred taxes. If you have ambitious financial goals for retirement and are currently a high earner, it makes sense to consider adding a LIRP to your arsenal.