A life insurance retirement plan (LIRP) is a life insurance policy with a permanent term that can be used to fund retirement. LIRPs include a cash element that can grow tax-deferred, meaning you only have to pay tax retirement gains once you decide to withdraw them. This is a significant benefit compared to other pension savings options, such as 401(k)s and IRAs, which have withdrawals taxed as average income.

What Is Life Insurance Retirement Plan (LIRP)

A LIRP, also known as a life insurance retirement plan, is a kind of permanently insured life insurance specifically designed to assist you in saving for retirement. LIRPs can work by allowing the policyholder to pay tax-deductible premiums, and any cash accumulating within the policy is tax-free. This means you will only need to pay taxes on the amount you invest in the policy or the investments’ earnings once you take out the money at retirement.

LIRPs are an excellent option for those seeking a tax-efficient option for saving for their retirement. It’s crucial to remember that LIRPs are challenging and costly. Therefore, you must consult an advisor in the field to determine if they’re the right choice for you.

How Does a Life Insurance Retirement Plan Work?

Through An LIRP, you invest premiums into a life insurance plan that accumulates value as time passes. The cash value can be used to borrow against or withdraw:

• Before the age of 59 1/2, The withdrawals and loan amounts were tax-free as long as the amount you withdraw is lower than the amount of your premiums, also known as “basis.”
• All loans and withdrawals are tax-free once you reach 59 1/2.

In the event of your death, the death benefit from the policy is distributed in tax-free installments to beneficiaries. However, the death benefit can be diminished by the amount of withdrawals you made and loans from the policy that were not returned. If your primary purpose for having your LIRP’s purpose is to utilize its cash value, you might not care about the death benefit amount.

LIRPs are basically “overfunded” policies, meaning you can take in more than the amount required to preserve an amount for the death reward. This permits the policy to accrue cash value quicker and boost the tax-free income available in retirement.

How LIRP Loans Work

LIRP loans are one of the main benefits of owning an LIRP. When the value of your insurance policy grows, you may draw money from it to augment your retirement income even before 60 1/2. The procedure is pretty simple:

• Determine how much money your cash is worth. Then, determine the amount you would like to cash out.
• Get a loan from the insurance company that offers you the desired amount.
• There’s no set time frame for repayment; you can repay the loan anytime. A danger is that a late loan can lower your death benefit. Therefore, it is essential to handle the loan with care. In addition, the life insurance provider will continue to issue charges for policies. When the value of your cash drops below a certain amount, the policy could be canceled. In this case, you’ll have to pay premiums to maintain the coverage in the force.

How LIRP Withdrawals Work

There are other ways of accessing the cash value of your LIRP. When you reach 60, you can make money tax-free until the basis. Any withdrawals that exceed the basis are tax-deductible.

After 59 1/2 years, withdrawals aren’t taxable.

Example of an LIRP

Imagine you begin an LIRP when you’re 30. When you turn 65, you’ve already paid $175,000 in premiums, and your balance in cash has increased by $700,000 because of capital gains.

The withdrawals will be tax-free after retirement. Before age 59 1/2, you can withdraw funds without taxation on the first $175,000 — the premiums you’ve already paid. If you withdraw more than $175,000, the portion of the money is tax-deductible.

Here are a few of the advantages and disadvantages of LIRPs:

Pros:

• Premiums tax-deductible
• Tax-deferred cash value
• Death benefit to beneficiaries
• Possibility of high-returns

Cons:

• Premiums are high
• Complex and costly
• Surrender fees may be charged
• The withdrawals may result in income tax
• Advisor
• Life Insurance

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Life Insurance Retirement Plan (LIRP)

Cassidy Horton Contributor Doug Whiteman Editor

Fact Checked

Published: Aug 29, 2023, 9:42 am

Editor’s Note: We receive a portion of the commissions from links to our partners to Forbes Advisor. Commissions are not a factor in the opinions of our editors or opinions. Getty

An insurance plan for retirement that is life insurance provides the advantages of life insurance and the assurance from retirement savings. A LIRP will not replace your IRA as well as 401(k); however, it could be used as an additional option to your retirement plan.

What Is an LIRP?

Life insurance plans are long-term Life insurance coverage, for example, universal life insurance that blends life insurance coverage and the “cash value” component that you can draw from for retirement funds (or whatever else you’d like). LIRPs aren’t considered term life insurance since it doesn’t include a cash value component.

One of the most significant advantages of a LIRP is the tax advantages. The value of the cash grows tax-deferred, which means you won’t have to pay taxes on gains until you cash them out. In addition, certain loans from insurance companies and withdrawals are tax-free if they do not exceed the amount you’ve spent on premiums.

How Does a Life Insurance Retirement Plan Work?

In the LIRP plan, you pay for premiums to the Life insurance policy that accumulates in value as time passes. The cash value can be borrowed or withdrawn from:

• Before the age of 59 1/2, the withdrawals and loans are tax-free if the amount you withdraw is lower than the amount of the premiums you’ve paid, referred to as. “basis.”
• All loans and withdrawals are tax-free until the age of 59 1/2.

In the event of your death, the policy’s death benefit will be paid without tax to the beneficiaries. However, the death benefit can be diminished by the amount of withdrawals you took and policy loans that weren’t reimbursed. But if your primary purpose for having the LIRP was to use your cash value, then you need not worry about the death benefit amount.

LIRPs are basically “overfunded” policies, meaning you can pay more money than you need to preserve an amount for the death reward. The excess money permits the policy to accrue cash value faster and increases the tax-free income available in retirement.

How LIRP Loans Work

Loans from life insurance policies are one of the main benefits of owning an LIRP. When the value of your insurance policy grows, you may draw money from it to augment your retirement income, even before 60 1/2. The procedure is relatively simple:

• Determine how much money the cash you’ve got, and determine the amount you would like to withdraw.
• You can request a loan through the insurance company, which will give you the needed amount.
• There’s no set timeframe for repayment, and you can repay the loan anytime. A danger is that a late loan can lower your death benefit, so it’s crucial to manage the loan carefully. In addition, the life insurance provider will continue to issue policy fees when the value of your cash drops below a certain threshold; the policy may be canceled. In this case, you’ll need to pay more premiums to maintain the plan.

How LIRP Withdrawals Work

The withdrawal option is another way of accessing the cash value of your LIRP. Before turning the age of 59 1/2, you can withdraw funds tax-free, up to the basis. Any withdrawals that exceed the basis are tax-deductible.

After 59 1/2 years, the withdrawals aren’t tax deductible.

Example of an LIRP

You sign up for an LIRP at 30. When you turn 65, you’ve already paid a sum of 175k in insurance premiums, and your cash value account has risen to $700,000 thanks to capital gains.

The withdrawals will be tax-free after retirement. When you reach 59 1/2 years old, you can withdraw funds without taxation on the first $175,000, the premiums you’ve already paid. If you withdraw more than $175,000, the part is tax deductible.

Pros and Cons of a LIRP

A LIRP is an excellent instrument for planning your retirement. However, it’s crucial to consider all the benefits and drawbacks before choosing.

LIRP prosLIRP Cons

Income tax-free in retirement Fees and premiums that are higher

Death benefits are tax-free for beneficiaries, Not a solution for retirement that is a stand-alone

There are no contribution limits. Unpaid loans and withdrawals lower the death benefit

There are no minimum distributions that must be met (RMDs). There is the possibility of policy cancellation when the value of cash falls below a predetermined minimum

Rates of return guaranteed on cash value, with specific policies A substantial amount of cash value required to earn income tax-free

How Much Does a LIRP Cost?

The amount you will be charged for an LIRP is contingent on these elements.

• Costs. Your premiums will depend on the amount of coverage you select, your age, health, and many other aspects. Healthy, young, and healthy people generally have the lowest premiums for life insurance.
• Costs. There will be fees for your LIRP, such as administration, expense, and surrender costs. If purchasing a LIRP, you should request a complete cost disclosure and the life insurance policy’s illustration.
• Riders. Some LIRPs offer riders that can help enhance your policy’s coverage by offering protection for long-term care and disability income. The addition of riders typically increases costs.
• Taxation. There may be tax consequences if you abandon your insurance or borrow excessive money.

The Life Insurance Retirement Plans in contrast to. 401(k)s as well as IRAs

LIRPs aren’t a substitute for 401(k)s or IRAs. However, they can be used with retirement plans that operate differently.

LIRP in contrast to. 401(k)s

Here’s how the 401(k) program is compared to a LIRP.

• Employer-sponsored in contrast to. Individuals. The employer manages and provides a 401(k) plan, whereas an LIRP is managed individually. Workers are automatically enrolled in their company’s 401(k) program, which means there’s little you need to create it.
• The matching contribution feature. A 401(k) usually offers employer-matched contributions, which can significantly improve retirement savings. LIRPs don’t have this option.
• Limits on contributions. The IRS sets annual contribution limits for 401(k)s–$22,500 in 2023. LIRPs are not subject to this limitation. Therefore, you can take advantage of the opportunity to save to retire in an LIRP. It’s important to understand that should you exceed the amount of money you have in your LIRP to the point of being excessive as per the tax code 772, it will turn into an amended endowment contract (MEC) and will be subject to tax regulations that differ.

LIRP Vs. IRAs

Life insurance plans for retirement combine life insurance benefits with cash value growth, whereas the individual retirement plan is an investment. Let’s take an analysis of the differences between them.

• Tax benefits. LIRPs are similar to Roth IRAs because you do not pay taxes when you withdraw funds after 59 1/2. Traditional IRAs delay taxes until you withdraw at retirement.
• Limits on contributions. IRAs have annual contribution limits, 2023 $6500 for those under 50 and $7,500 for those over 50, but LIRPs don’t. You can put more money into retirement with an LIRP, but be aware that if you overfund your LIRP by more than the tax code 7702 permits, the LIRP will be the status of an MEC and will be subject to different tax rates.
• Minimum required distributions. Unlike traditional IRAs, LIRPs are not obligated to withdraw money at retirement and are referred to as required minimum distributions, also known as RMDs. You can keep the funds you have invested in an LIRP for as long as you want. RMDs for Roth IRAs do not start until the day after your death.

Who Needs a Life Insurance Retirement Plan?

The life insurance plan retirement could be beneficial in the following scenarios: could apply to you:

• You’ve reached the limit of all your retirement savings accounts. If you hit your limit on 401(k) or IRA contributions, An LIRP may be an excellent option to make more savings to fund your retirement.
• You likely have substantial value net. The death benefit from your insurance policy could serve to cover estate tax. Therefore, your heirs will not need to sell their assets to pay the tax burden.
• You’re trying to diversify your portfolio for retirement. Depending on the kind of life insurance policy, its cash values may be put into various asset classes, such as bonds, stocks, and mutual funds.

Which Companies Offer LIRPs?

Life insurance retirement plans through any business that sells cash-value life insurance policies. If you’re considering an LIRP, look at the plans and choose the one that most closely matches your needs. Contact an insurance professional for assistance in narrowing your choices.

Companies that provide LIRPs include:

• Aflac
• Guardian
• Nationwide
• Northwestern Mutual
• New York Life
• MassMutual
• Ohio National
• Pacific Life
• Penn Mutual
• Protective

Alternatives to an LIRP

There are many methods to save for retirement, so think about these options to get an insurance plan for retirement.

IRAs

There are two main kinds of retirement accounts, both individual and corporate. They will aid you in saving and growing savings to save for retirement. If you have a traditional IRA contribution, you reduce your tax-deductible income in the present, and you only pay taxes once you take it out when you retire. With a Roth IRA, you pay taxes on the contributions you make now and get tax-free withdrawals at retirement.

Workplace Retirement Plans

If your company offers a retirement plan for employees, like 401(k), 403(b), or 403(b), it could be a fantastic method to save money for retirement. The plan allows you to contribute before tax and reduce your taxable income during the year. Employers often offer matching contributions that can aid you in saving even more.

HSAs

If you’re a member of an insurance plan with a high deductible or plan, you may qualify to open an HSA or health savings account (HSA). These withdrawals are tax-free and tax-free to pay for qualified medical expenses. Once you reach the age of 65, you can withdraw funds at any time without penalty. However, you might have to pay tax on income.

Taxable Accounts

If you’ve exhausted all your tax-free retirement accounts, You can still put aside money for retirement with a tax-deductible investment account. While you’ll never receive tax advantages, you’ll have more freedom in investing your money and when you can remove it.

Annuities

Annuities provide retirees with a source of income. Annuities can be purchased through an insurance company using an amount in one lump sum or a set of payments. Annuities are offered in various forms, which include fixed, variable, and index options.