A life insurance retirement plan (or LIRP) is the process of using a life insurance policy to help provide cash flow at some point in the future. It can be used to supplement your income, help pay for education costs, or simply provide a nest egg for your loved ones in the event of your death.
While it is not right for everyone, a life insurance retirement plan can be an important part of a sound financial strategy. The primary benefit of LIRP is that it provides tax-free income to the policy owner at some point in the future. Most people interested in a life insurance retirement plan should have a long-term outlook (e.g. greater than 10-years).
A life insurance retirement plan can also offer tax advantages, which can help you maximize your retirement savings. If you are considering a LIRP, it is important to understand how it works and what its benefits and drawbacks may be.
First, you should decide what type of policy makes the most sense given your financial situation and risk tolerance. The most common types of policies that are used are whole life insurance or indexed universal life insurance.
When designing a LIRP policy we are designing it for accumulation and not necessarily death benefit protection. The goal is to maximize cash flow from the policy at some point in the future. In order to accomplish this, the policy design is very important.
Typically the best way to do this is to design the policy using a minimum death based on the annual premium that avoids becoming a Modified Endowment Contract or MEC.
When using a minimum death benefit it is important to use it in combination with an increasing death benefit. This reduces the policy expenses and maximizes policy cash value growth, which will generally result in more policy income in the future.
Once the policy owner is done funding the policy it can be important to switch the increasing death benefit to a level death benefit. Again, the main reason for doing this is to maximize the policy’s cash values and cash flow from the policy.
What makes LIRP unique is the cash value growth in the policy is non-taxable as long as the policy remains in force. When it is time to receive cash flow from the policy it is done in the form of a withdrawal or loan. This means all distributions from the policy are tax-free.
This can create a great benefit for the policy owner allowing them to pick and choose what assets they access during retirement based on how they are taxed. In addition, a LIRP generally does not have any penalties if you choose to access policy cash values prior to age 59 1/2. And, you are not forced to take distributions from the policy at a specific age.
If the insured passes away prior to accessing policy cash values the beneficiary will generally receive the death benefit on a tax-free basis. The death benefit will always be greater than the policy cash values.
If you are serious about saving for retirement, a life insurance retirement plan is worth considering. It can provide you with peace of mind knowing that you have a source of income that can last a long time.