What Is a Life Insurance Retirement Plan (LIRP)?

A life insurance retirement plan (LIRP) isn't a specific product. It's a strategy that uses a permanent life insurance policy, coverage that stays active for your entire life instead of expiring after a set term, to supplement retirement income. These policies combine two pieces: a death benefit, the money your beneficiaries receive when you die, and a cash value, a savings account built into the policy.

A portion of your premium payments goes into the cash value instead of just covering the cost of insurance. It grows tax-deferred. You don't owe taxes on its growth each year, the way you might with a regular investment account. Over time, this balance becomes a source of money you can tap into for retirement income, through loans or withdrawals. The death benefit stays in place the whole time, as long as you keep paying premiums, so your family still gets covered if you die before you retire.

LIRPs supplement traditional retirement accounts rather than replace them. Unlike 401(k)s and IRAs, life insurance wasn't designed primarily for retirement savings. It also costs more and comes with more complex rules than a typical 401(k) or IRA.

Taking loans or withdrawals can reduce your death benefit dollar-for-dollar unless you repay borrowed amounts. If you borrow $50,000 from a policy with a $500,000 death benefit, your beneficiaries receive $450,000 when you die (assuming you didn't repay the loan). The loan balance plus interest accrues against your death benefit.

Living benefit riders, when included in a policy, let you access part of the death benefit early after a qualifying diagnosis, such as a terminal illness. Any amount accessed this way reduces what your beneficiaries eventually receive.

LIRP taxation depends on how you access the cash value.

Withdrawals up to your cost basis (the total premiums you've paid) come out tax-free. Any amount above that basis counts as ordinary income.

Policy loans aren't taxed as income while the policy stays active. If the policy lapses with an outstanding loan balance, the unpaid amount becomes taxable.

Surrendering the policy pays out the remaining cash value. Any amount above your cumulative premiums paid is taxable in the year you surrender.

The biggest advantages of LIRP are tax-deferred cash value growth and no annual contribution limits. The biggest drawbacks are high fees and a 10- to 15-year wait before the cash value grows large enough to use.

LIRPs work for specific situations. They're not a first step in retirement planning. Consider an LIRP if you fit one of the profiles below.

• High-Net-Worth People: If you've maxed out your 401(k) and IRA and need another way to save tax-deferred, an LIRP can help you grow wealth tax-efficiently.
• People With Lifelong Dependents: If you have children with disabilities or other lifelong dependents, an LIRP covers them for life while building cash value you can use as retirement income.
• People Focused on Estate Planning: An LIRP's death benefit passes to your beneficiaries without income tax and can offset estate taxes owed on other assets. The cash value keeps growing during your lifetime, and you can still access it through loans or withdrawals if you need extra income before then.

Look elsewhere if you're just starting retirement planning. Put your first dollars into employer 401(k) matches (that's free money), then max out Roth IRAs for tax-free growth with fewer restrictions.

Young professionals under 40 usually get more value from term life insurance plus low-cost index funds for retirement. You'll grow wealth faster with this strategy. If you can't afford to fund a policy for at least 10 to 15 years, the early cash value growth won't justify the costs.

LIRP isn't the only way to build retirement income beyond a 401(k) or IRA. Pairing term life insurance with separate investing costs less than permanent coverage, since you're not paying for cash value you don't need. Roth IRAs skip life insurance fees entirely, though you give up the death benefit. Annuities trade some flexibility for guaranteed payouts instead. Many financial professionals recommend trying these options before adding a LIRP to a retirement plan.

Life insurance retirement plans work best for high earners who've already maxed out their 401(k) and IRA. They need to want permanent life insurance anyway and be able to commit to funding a policy for 10 to 15 years or longer. The strategy provides tax-advantaged retirement income through policy loans and keeps a death benefit for your beneficiaries. Cash value grows tax-deferred, and loans avoid income taxes when structured correctly.

LIRPs come with high costs, complexity and slow early growth. Most people build wealth faster through employer retirement plans plus low-cost index funds. Young professionals and those with temporary insurance needs usually do better with term life insurance and traditional investments for retirement.

LIRPs supplement retirement plans rather than replace them. Use this strategy only after maxing out simpler, cheaper options.