Relying on a 401(k) or IRA for retirement? There may be a better option. A Life Insurance Retirement Plan (LIRP) offers increased protection and less risk than qualified, market-based retirement products. And if you plan on retiring early, it could save you tens of thousands of dollars.
In this article, we’ll explain the fundamentals of the Life Insurance Retirement Plan, examine the benefits using whole life insurance to fund retirement, and help you decide if it’s the right strategy for your financial goals. Plus, explore a client case study to see an example of how LIRPs work in real life.
What is a Life Insurance Retirement Plan?
A Life Insurance Retirement Plan is a wealth strategy that utilizes dividend-paying whole life insurance from a mutual life insurance company to supplement or fully fund your retirement. It offers a number of protections and benefits not found in typical retirement strategies. To fully understand how a LIRP works, you first need to understand the basics of whole life insurance.
How Do I Use Life Insurance to Fund My Retirement?
When most people think of life insurance today, they think of term life insurance. Term life insurance’s only purpose is to provide a lump sum of money to a loved one in the event of an untimely death. But it’s not the only kind of life insurance, nor is a death benefit the only reason to buy life insurance.
Whole life insurance, which insures you for the entirety of your life (not just a predetermined term), features a cash value component. Similar to a high-interest savings account, you can accumulate wealth inside of your whole life insurance policy and use your cash value to pay for a variety of expenses, including retirement.
How your whole life insurance policy is structured will greatly affect how much cash value you build up inside your policy. Every time you pay your policy premium, a portion goes toward your cash value and a portion goes toward your death benefit. Whole life insurance often gets a bad reputation for slow growth because typical policies aren’t structured with retirement in mind—they’re structured to provide the largest death benefit possible to your beneficiary. However, when structured for living benefits like retirement, the cash value of your policy can rapidly increase.
There are two key components to a Life Insurance Retirement Plan necessary for meaningful growth:
- Utilize dividend-paying whole life insurance
- Purchase a Paid-Up Additions Rider (PUAR)
When your insurance policy is contracted through a dividend-paying whole life insurance company, you’re eligible for additional pay-outs from your insurance company in the form of dividends. This means, in addition to a guaranteed rate of return, you can also receive non-guaranteed dividends. The top-rated mutual insurance companies have consistently paid out dividends for over 100 years.
Your dividends can be used in a number of ways, but in a Life Insurance Retirement Plan they are often used to buy additional insurance called Paid-Up Additions. Paid-Up Additions allow you to “overfund” your insurance policy right up to the line of it becoming a Modified Endowment Contract (MEC). This rapidly increases your cash value while still retaining the tax-advantaged status applied to whole life insurance.
When you retire, you access your cash value through policy loans. The reason policy loans are utilized, rather than outright withdrawing your cash value, is that policy loans aren’t taxed. All the interest and dividends you’ve built up in your insurance policy can be used tax-free, which often means more money in retirement compared to other qualified plans.
Policy loans can be used at any time, for any reason, provided you have sufficient cash value. You can use policy loans for college tuition, a downpayment on real estate, family vacations, cars, business expenses, and more. You essentially become your own banker, setting the payback terms of your loan. Plus, your policy continues to earn interest and potential dividends regardless of how much cash value you borrow.
99% of the time, it’s in your best interest to pay back your policy loans. This allows you to infinitely bank. But in the case of a Life Insurance Retirement Plan, you utilize policy loans without the intent to pay them back. Instead, at the end of your life, your outstanding policy loans are deducted from the death benefit of your insurance policy. The remaining death benefit goes to your designated beneficiary.
As you can see, a Life Insurance Retirement Plan with dividend-paying whole life insurance isn’t structured with the death benefit as its main function; it’s structured so you can maximize the living benefits of your policy in retirement.
7 Benefits of Using Life Insurance for Retirement
- LIRPs act as a buffer against market volatility.
Because they’re not tied to the market, Life Insurance Retirement Plans are excellent assets to have during a market downturn. You can utilize the cash value of your insurance policy to fund retirement, acting as a volatility buffer in the years after a bear market, allowing funds in your qualified retirement accounts time to rebound.
2. LIRPs are tax-advantaged assets.
Life Insurance Retirement Plans come with a variety of tax benefits, including tax-free policy loans for tax-free retirement income. Your remaining death benefit is also income and estate tax-free. Because you fund your LIRP with after-tax dollars, there’s no guesswork as to what tax bracket you’ll be in when you retire—pay your taxes upfront and enjoy peace of mind in retirement.
3. There’s no limit on annual LIRP contributions.
Qualified 401(k) and IRAs both have limits on annual contributions. Wealthy investors who max out their annual retirement contributions can have more options when it comes to saving for retirement by using a Life Insurance Retirement Plan. Provided whole life insurance policies aren’t overfunded to the point they become MECs and lose their tax-advantages, hundreds of thousands of dollars can be placed in LIRPs annually.
4. LIRPs have a guaranteed rate of return.
Unlike market-based retirement accounts, which constantly fluctuate, Life Insurance Retirement Plans enjoy a guaranteed rate of return. You’ll never take a loss, regardless of a market downturn. Individuals looking for more certainty in retirement with less financial risk may find the stability of a LIRP more appealing than gambling their money in the stock market. In addition to a guaranteed interest rate, LIRPs also earn potential dividends. In fact, once taxes, administrative fees and potential market losses are factored in, a LIRP often outperforms a 401(k).
5. You can access funds in a LIRP at any age without penalties.
Most funds in qualified retirement plans can’t be accessed before age 59 ½ without paying a 10% penalty on withdrawals. The cash value of a Life Insurance Retirement Plan can be accessed at any age, making it a key tool for anyone planning on early retirement and can save you tens of thousands of dollars in penalties down the road.
6. LIRPs offer a guaranteed death benefit.
Although the main function of a Life Insurance Retirement Plan is to offer living benefits to the policy holder, it’s still a life insurance policy, so it comes with a tax-free death benefit. Plus, the death benefit of a LIRP isn’t subject to probate, so your beneficiary gets paid quickly.
7. LIRPs can offer additional insurance protections.
On top of a Paid-Up Additions Rider—supplemental insurance that allows you to rapidly grow the cash value of your insurance policy—you can add on other riders like Long-Term Care and Disability to better protect you and your family. By customizing your LIRP with insurance riders, you create a comprehensive, multi-faceted asset with numerous benefits and protections beyond what any other retirement product can offer.
Is a Life Insurance Retirement Plan Right for Me?
Life Insurance Retirement Plans, like all financial tools, aren’t a one-size-fits-all strategy. Your unique financial situation and goals ultimately determine which wealth strategy is right for your needs. LIRPs are best suited for individuals who are financially responsible and want to take a more active role in their retirement planning.
High-income individuals who max out their retirement contributions and want to save even more are great candidates for LIRPs. The lack of annual contribution limits with the addition of several tax advantages and the ability to infinitely bank are ideal for wealthy families and aggressive savers.
Anyone who is planning on retiring early may also want to seriously consider a LIRP, as there are no penalties for accessing your retirement funds before age 59 ½.
Because LIRPs are whole life insurance policies, you must be able to qualify for life insurance in order to utilize this retirement strategy. The younger you start, the more likely you’ll be able to qualify for insurance and lock in a lower premium—but it’s possible to add a LIRP to your portfolio even if you’re already in retirement or approaching retirement.
How Expensive is a Life Insurance Retirement Plan?
There isn’t a set price for a Life Insurance Retirement Plan. The amount of your insurance policy depends on your financial goals; LIRPs are completely customizable to fit your needs and your budget.
Compared to term life insurance, a Life Insurance Retirement Plan can cost 5-15 times more per year. But a LIRP serves a very different purpose than regular life insurance. When you set up a LIRP, you essentially commit to saving a certain amount of money every year, most of which you will recoup in retirement, along with tax-free interest and dividends. The remainder goes to your beneficiary.
With term life insurance, there are no living benefits and if you don’t pass away within the specified term, your beneficiary gets nothing. Term life and whole life are two completely different products with different functions; the right one for you depends on your financial priorities.
How Do I Set Up My Life Insurance Retirement Plan?
To build the right Life Insurance Retirement Plan for your goals, it’s imperative to work with a qualified Wealth Strategist. Most financial planners don’t know how to properly structure a LIRP, which could leave you stuck with a whole life insurance policy that doesn’t grow cash value efficiently for retirement.
Paradigm Life Wealth Strategists work with nation’s top-rated mutual insurance companies who have paid out dividends for over 100 years and specialize in LIRPs. Your Wealth Strategist can customize the best policy for your budget and retirement goals, and consultations are always free. Plus, your Wealth Strategist will check in for an annual review every year (or more often, if needed) where you can make sure you’re on track to meet your retirement goals and make adjustments to your LIRP.
Case Study: Retiring With a LIRP
35-year old Aaron knew the importance of investing for a comfortable retirement, but didn’t want to tie up all his cash in a qualified plan he’d be penalized for accessing before age 59 ½. Looking for a better way to save for retirement than a 401(k) or IRA, he met with Paradigm Life Wealth Strategist Justin Atkinson to set up a Life Insurance Retirement Plan.
Based on Aaron’s unique financial goals and budget, Justin suggested a Guaranteed Choice® Whole Life policy from Penn Mutual with an Enhanced Permanent Paid-Up Additions Rider, offering guaranteed growth, regardless of what happens in the market. Aaron won’t have to worry about losing his retirement savings if his market-based investments don’t perform well.
By age 65, Aaron is projected to have a guaranteed $1.2 million in cash value for retirement and a $2.6 million death benefit. When non-guaranteed dividends are factored on, based on Penn Mutual’s historical performance data, Aaron could have over $2.2 million in cash value for retirement and a death benefit of nearly $4.4 million.
Curious to see how the numbers stack up? Explore Aaron’s case study here.
If you’re looking for a retirement product that offers you more control with less risk than the stock market, the blended benefits of a qualified Roth IRA and permanent life insurance, and no annual contribution limits or early withdrawal penalties, a Life Insurance Retirement Plan may be the right option for you. Schedule a free consultation with a Paradigm Life Wealth Strategist today and see how much tax-free income you could enjoy in retirement with a LIRP.