Life Insurance Retirement Plans
- You can use your life insurance policy's cash value to bolster your retirement funds. This is widely referred to as a life insurance retirement plan (LIRP).
Retirement should be a time when it doesn’t matter if you’re keeping up with the Joneses. After decades of hard work and building your career, you can kick your feet up, throw your arms behind your head and take your time sipping a morning cup of joe while deciding what you’d like to do that day. A lifetime of work has finally come to a graceful close, and now the world is your oyster.
But it’s not always quite that simple, is it? Even with careful planning and saving, sometimes retirement can go from being your hard-earned golden years to yet another source of financial stress. Health care alone can be one of the most substantial expenses you face as you enter retirement– the average retired couple’s outlay on health care alone is just shy of $300,000 throughout the course of retirement.
Thankfully, the abundance of tools and resources available to retirees (IRAs, 401ks, etc.) can help you prepare for these often-unforeseen expenses. But did you know you can also utilize life insurance as a financial bolster to supplement your retirement income?
Read on to learn about life insurance retirement plans and if they’re right for you.
What Is a Life Insurance Retirement Plan (LIRP)?
Whether you own a whole life insurance policy or some other form of cash value life insurance, you can use your policy’s cash value to supplement your retirement savings. This is widely referred to as a life insurance retirement plan (LIRP).
By using a LIRP as a saving strategy to complement your pre-existing retirement preparations, your cash gains become tax exempt. LIRPs also aren’t typically saddled with the distribution-related restrictions that accompany IRAs.
How a LIRP Can Help Fund Your Retirement
Bear in mind that while a LIRP can offer more fiscal flexibility and tax advantages to your retirement, it isn't designed for the purpose of replacing all other traditional avenues of saving for retirement. It’s merely meant to add support to your retirement budget and provide substantial benefits in certain circumstances. When you pay your premium on your cash value life insurance policy, a certain percentage of your payment goes into a tax-deferred, investment-like savings component, which increases the cash value of your policy. By adding funds in increments over time, you help your policy build in value by the time of your retirement.
The exact percentage of your premium payment that gets saved varies from policy to policy and provider to provider. Once you’ve accumulated a certain cash amount, you can access this money similar to an actual savings account with a bank. You can withdraw funds, take a loan out against them or even use it to gain tax exemption on your retirement income.
One thing you can do to increase your LIRP’s cash value is pay more than your required premium. The excess funds go straight into the cash value, thus building it exponentially faster than you could simply paying your minimum premium. However, this strategy only works if you don’t make any withdrawals before the age of 59 ½. Additionally, if you overfund your cash value policy too much and exceed the annual premium limit set by the IRS, your policy will convert into a modified endowment contract (MEC), which comes with all new regulations, taxes and penalties.
Most life insurance companies recommend the “4% rule” to help you better strategize your retirement budget. Once you reach 59 ½ years of age, withdraw no more than 4% of your funds per year. In the event of an economic downturn or stock market crash, this strategy can ensure your financial security and stability.
Many LIRPs will also allow you the option to add on something called a long-term care rider. This rider contributes an accelerated death benefit to your policy’s funds, thus providing further fiscal assistance in the event of a medical emergency or assisted living costs.
Who Is a LIRP Good For?
Most individuals have far fewer financial obligations as they get older. Your mortgage is fully paid, you no longer have any dependents to financially support — you’re down to the bare necessities. Due to this, many people don’t need life insurance at all by the time they retire. However, if your financial situation is a bit more complex, a LIRP may be just the supplement your retirement budget needs. Some common circumstances in which a LIRP is considered appropriate include:
- High-income earners who are looking for additional avenues to save for retirement, especially in the event that other retirement accounts are already maxed out.
- High-net-worth individuals experiencing estate tax issues. (The advanced death benefit granted by a long-term care rider can help you pay these taxes.)
- Individuals with lifelong dependents, such as children with disabilities, who will always need care and assistance financially and otherwise. (In this kind of situation, a long-term care rider can be a perfect supplement to help you continue to financially support your dependent on through your retirement.)
How Do Retirement Plans and Life Insurance Differ?
Not every life insurance policy is considered a LIRP. Only permanent policies with cash values, such as whole life insurance, can help bolster your retirement. Term life insurance policies, which lack cash value components, are not considered LIRPs and can’t be used to build up retirement funds.