A Life Insurance Retirement Plan (or LIRP for short) is a permanent life insurance policy that uses the cash value component of your policy to assist in funding your retirement. LIRPs are similar to Roth IRAs in that your withdrawals are not taxed after you turn 59 and a half years old, and any cash gains are tax-deferred. However, LIRPs are different in that withdrawals prior to age 59 and a half are also tax-free.
What Makes This Plan Different from a Traditional IRA or 401(k)?
If you own a type of cash value life insurance, such as a whole life insurance policy or IUL, you can use its cash value to subsidize your retirement plan.
A 401(k) is a savings plan for retirement that employers generally offer to their employees. An employer will usually match a certain percentage of the employee’s contributions to this account.
An IRA is similar to a 401(k), except that it is opened and funded entirely by yourself. They are generally used in addition to a 401(k) to fund retirement.
How Do These Match Up to a Life Insurance Retirement Plan?
LIRPs are generally used to fill in the gaps during years of economic downturn. Essentially, if you max out contributions to traditional investment accounts, you may pay extra funds into your cash value for tax-deferred investing growth.
This means in years when the stock market takes a downturn, you can withdraw from an account that has not depreciated in value. LIRPs are generally used to supplement existing retirement investment plans and should typically not be your only investment method.
Should I Consider Investing in a Life Insurance Retirement Plan?
Most people will not need life insurance of any kind by the time they retire. However, there are some special cases in which it would be worth considering investing in life insurance well into retirement. For example, those with lifelong dependents (such as children with disabilities) might consider continuing their coverage.
Retirees might also consider continuing their life insurance past retirement. This would make sense if they have already maxed out their contributions to their traditional investment plans and are looking for another way to have tax-free income.
If either of these applies to you, it may be worth considering investing in a Life Insurance Retirement Plan. Another thing to consider is the cost of investing.
Cost of Investing in a Life Insurance Retirement Plan
Generally, whole life insurance or IUL costs more than term life Insurance, and most people will not need to invest in whole life insurance. However, if the whole is something you are considering, it’s important to understand the costs and benefits.
Most whole life and IUL insurance policies cost 5 to 15 times more than term life insurance policies. However, your premiums and any additional investments into it go directly into investing in your LIRP. You may be asking yourself if it is worth it in addition to a traditional IRA or 401(k). It’s best to compare these options and your investing capability.
Is a Life Insurance Retirement Plan Worth It?
For most people looking at their retirement plan, a LIRP may be worth the cost of investing. There are a few main takeaways to consider when looking to invest in your retirement. First, the initial cost of a whole life or similar cash value life insurance policy can be a barrier to entry for some.
For those with the funds available to invest, you must compare your investing capabilities to your current investments in a traditional IRA or 401(k). The main pro to a LIRP is that there is no limit for contributions, you get tax-deferred growth, tax-free income and principal protection. The main drawbacks, however, are that the return on investment is lower than 401(k) accounts, and contributions are not tax-deductible.
Is a Life Insurance Retirement Plan a Good Avenue for Investing for Retirement?
The short answer is that it depends. For some people, it’s not recommended to invest in a LIRP. However, it is worth considering a Life Insurance Retirement Plan for those who can feasibly maintain the high premiums through retirement and are looking for more ways to get returns on retirement investments.
If you are consistently maxing out your current retirement investments, looking for ways to bring down your tax obligation in retirement and or are looking for more ways to invest your funds, a LIRP might be right for you.
Investing in Your Future, and Beyond
A LIRP is not generally needed for some people considering retirement investments but if you are looking for tax-free income and to maximize your investments as you approach retirement, a LIRP is definitely worth considering.
Matador Insurance can help you evaluate your options in just minutes, whether you’re interested in learning more about life insurance retirement plans or determining what kind of coverage is suitable for you. Contact us online or request a consultation to address any questions or concerns you may have about a life insurance retirement plan today.