A Life Insurance Retirement Plan (LIRP) is a financial strategy that leverages the cash value component of a permanent life insurance policy to save additional money for retirement. LIRPs are designed for individuals who already have traditional retirement accounts like a 401(k), IRA, and/or Roth IRA, and they serve a dual purpose: providing tax-free retirement income while also offering a tax-free legacy for loved ones.

How LIRPs work

1. Permanent Life Insurance Policy: LIRPs are typically built around permanent life insurance policies, with the most common type being whole life insurance. Permanent life insurance provides coverage for the entire lifetime of the insured and accumulates cash value over time. This cash value can be accessed during the policyholder’s lifetime.

2. Cash Value Accumulation: When you pay premiums for your permanent life insurance policy, a portion of those premiums goes towards the cost of insurance, and the remaining amount goes into the cash value component. This cash value grows over time, often at a guaranteed or fixed rate of return.

3. Tax-Advantaged Growth: The cash value within a LIRP grows tax-deferred, meaning you don’t have to pay taxes on the gains as they accumulate. This tax-advantaged growth can be a valuable feature for retirement savings.

4. Policy Loans: One of the key features of a LIRP is the ability to take out policy loans against the cash value of the insurance policy. These loans are generally tax-free and can be used as a source of retirement income. Unlike traditional loans, policy loans do not require credit checks, and you are not obligated to repay them during your lifetime. However, outstanding loans can reduce the death benefit that your beneficiaries receive.

5. Tax-Free Retirement Income: During retirement, you can access the cash value in your LIRP through policy loans. Since these loans are not considered taxable income, they provide a source of tax-free retirement income, which can supplement other retirement accounts like a 401(k) or IRA.

6. Tax-Free Legacy: In addition to providing retirement income, LIRPs offer a tax-free legacy for your loved ones. When you pass away, the death benefit paid out to your beneficiaries is typically income tax-free, which can be a valuable estate planning tool.

7. Various Strategies: LIRPs can be configured and utilized in a variety of ways to increase retirement income. Some individuals use LIRPs as a way to create a pension-like income stream, while others may use them as a tax-advantaged way to leave a financial legacy for their heirs.

Is a LIRP Right for You?

It’s important to note that LIRPs may not suitable for everyone, and that there are many options to choose from when selecting the ideal policy for a specific retirement case.  All policies come with complexities that should be carefully considered. Additionally, the tax benefits associated with LIRPs are subject to specific rules and regulations, so it’s crucial to consult with an insurance specialist before implementing such a strategy to ensure it aligns with your financial goals and needs.