Life Insurance Retirement Plan: A Primer

Retirement planning is an essential part of holistic financial planning. While there are several ways to save for retirement, a Life Insurance Retirement Plan (“LIRP”) is an option that many people may not be familiar with. In this post, we'll explore what a LIRP is, how it works, and whether it may be a good option for your retirement planning needs.

Life Insurance Retirement Plan Basics
What is a LIRP? A LIRP is a type of life insurance policy that is designed to provide retirement income. Unlike traditional life insurance policies, which only pay out upon the policyholder's death, a LIRP allows the policyholder to accumulate cash value over time that can be used for retirement income. The policyholder can withdraw or borrow against the cash value of the policy, income tax-free, to supplement their retirement income.

How does a LIRP work? A LIRP works by combining two components: a life insurance policy and a cash value account. The policyholder pays premiums into the policy, which are invested in the cash value account. Over time, the cash value of the policy grows tax-deferred. The policyholder can withdraw or borrow against the cash value of the policy, tax-free, to supplement their retirement income.

The IRS mandates the minimum life insurance amount to qualify for preferential tax treatment. Essentially, one buys a policy with the smallest allowable life insurance component and the largest cash value component.

Deciding If a Life Insurance Retirement Plan is Right for You
Is a LIRP right for you? Whether a LIRP is right for you depends on your individual financial situation and retirement planning needs. Here are some factors to consider:

• Your age: As with any retirement planning tool, time is on your side (until it isn’t). The earlier you start a LIRP the better. Starting early allows cash values to accumulate over a long period of time. Older pre-retirees should not be put-off, though. We have strategies to help a LIRP work within your compressed savings timeline.
  
• Your health: LIRPs typically require a medical exam, so if you have health issues, you may not qualify.
• Your retirement income needs: If you have other sources of significant retirement income, a LIRP may not be necessary. Though, it is important to note, LIRPs offer tax-free income.

Ultimately, the decision to invest in a LIRP should be made in consultation with a financial advisor who can help you evaluate your options and make the best choice for your individual financial situation. Make sure a LIRP is part of a comprehensive wealth management plan. A LIRP by itself is of no use if it doesn’t work with all the other parts of your financial plan.

A LIRP can be a valuable addition to your retirement planning strategy, but it's important to carefully consider whether it's the right choice for you. By working with a financial advisor and understanding the potential benefits and risks of a LIRP, you can make an informed decision and plan for a comfortable retirement.