Life insurance retirement plans (LIRPs)

LIRPs (life insurance retirement plans) are one way to save money to sustain yourself after you retire. These programs supplement more traditional kinds of retirement savings, such as IRAs, with certain types of life insurance coverage. LIRPs can help bridge gaps in other retirement plans under the right conditions. Some of this enhancement is due to LIRPs having less constraints than alternatives while still providing different possibilities for utilizing the plan. Because LIRPS are, first and foremost, life insurance plans, they operate under different rules than other retirement programs.

Life insurance retirement plans explained

A life insurance retirement plan is a permanent or cash value life insurance policy that is funded over time to accumulate a significant cash value when you retire. Permanent life insurance policies, unlike term life insurance policies, have no defined duration and last as long as you make the payments. LIRPs can offer retirement savings with an additional stream of income when they stop working, in addition to their IRA and retirement plan disbursements.

LIRPs lack some of the tax advantages that IRAs and qualifying plans have, but they do have a few advantages that they cannot duplicate. Certain types of LIRP distributions, for example, have no age limitation. Except in rare circumstances, distributions from IRAs and qualifying plans will be taxed if taken before the age of 59 ½. Furthermore, unless the investor is contributing to a variable universal life insurance policy, LIRPs can frequently guarantee the investor's principal and interest.

That guarantee means that the insurer has pledged a minimum interest rate and that your cash value is secured against loss for those policies to which it applies. Variable universal life insurance policies, on the other hand, feature non-guaranteed interest rates that fluctuate with the underlying assets and the market. In layman's words, one protects against loss while the other promises possibly bigger gains but does not.

How to fund retirement with a LIRP

Funding a life insurance retirement plan is simple, but you should consult with a certified financial planner or a registered insurance specialist to ensure you get what you need. It simply entails purchasing a cash value life insurance policy for the desired coverage amount and then overfunding it by paying more than the minimum needed premiums. The extra amount will be deposited into the policy's cash value and will begin to accumulate faster than it would otherwise. Even if you do not overpay for these plans, a portion of your regular payment contributes to the accumulation of cash value in your policy.

Because there are few laws governing the process, it is one of the simplest types of retirement saving. Consider investing in a variable universal life policy that invests its cash value in financial markets if you want your policy to grow faster over time. This form of policy carries more risk, but also more potential return. You might also invest in an indexed universal life policy, which allows you to profit when financial indices rise while losing nothing when they decline. Everything is dependent on your risk tolerance and time horizon.

You can draw tax-free distributions from your accumulated cash worth in the form of policy loans when you retire. However, if your loans exceed the amount you've placed into the cash value part, the excess money is taxable and reduces your possible death benefit. Of course, you can take tax-free distributions from your Roth IRA if you have one, but the Roth does not provide death benefit protection and has annual contribution restrictions. Another word of caution: if you contribute too much, too soon, the IRS may convert your insurance into a modified endowment contract (MEC), and the tax ramifications may change.

Who needs a life insurance retirement plan?

The majority of the time, an LIRP is appropriate for retirement savers in three situations:

• High-income earners who are contributing as much as feasible to traditional retirement savings vehicles such as IRAs and 401(k)s and are seeking new ways to save for retirement.
• Families with special needs children who must be cared for at all times. In this case, the death benefit will give the monies required to support the insured's children following the insured's death.
• Individuals with high financial goals for retirement may find that branching into LIRPs on top of regular retirement savings plans is an efficient method to establish a broader retirement savings foundation. The IRS does not set a maximum contribution level for LIRPs because they use life insurance as an investment vehicle.

Here are the main benefits and drawbacks of a life insurance retirement plan to consider: