A Life Insurance Retirement Plan (LIRP) is a strategic financial strategy that blends the benefits of life insurance and retirement planning. Unlike traditional retirement vehicles, like an IRA or 401(k), a LIRP utilizes one or more permanent life insurance policies to provide individuals with a tax-advantaged method for accumulating wealth while providing financial security for their loved ones. 

How are LIRPs structured?

A Life Insurance Retirement Plan (LIRP) is not a specific type of insurance policy but rather an arrangement that is funded with permanent life insurance. A LIRP is designed to serve two purposes – providing the benefits of both life insurance coverage and a retirement savings vehicle. 

In order to design a LIRP, an advisor tailors the features and components of a permanent life insurance policy to align with their client’s goals of long-term wealth accumulation and tax-efficient retirement planning. 

Cash value

A LIRP is typically funded with either whole life, indexed universal life, or variable universal life insurance. The underlying policy provides both a death benefit to beneficiaries upon the policyholder's passing and a cash value component that grows over time. The cash value accumulation is a crucial element of the LIRP strategy.

Premium payments

In a LIRP, individuals make premium payments into the policy to fund the policy to its maximum limit. Unlike term life insurance, which provides coverage for a specific period, permanent life insurance generally remains in force for the entirety of the policyholder's life. If income is taken from the policy, keeping the policy in force until the policyholder’s death is critical, as a premature lapse could trigger adverse tax consequences.  If the policyholder received income from the policy that exceeds their cost basis, any gain at the time of policy lapse would be treated as taxable income. This lifelong coverage ensures that the death benefit will be paid out to beneficiaries whenever the policyholder passes away, offering financial protection to loved ones.

Accessing cash value

The distinguishing feature of a LIRP arrangement is its emphasis on leveraging cash value accumulation for retirement planning. As the cash value grows over time, it can be accessed through withdrawals or policy loans on a tax-advantaged basis. The ability of the policyholder to withdraw from the policy's cash value without the funds being taxed may make LIRPs an attractive option for retirement planning.

Funding

There are guidelines and considerations to be aware of when funding a LIRP:

• Modified Endowment Contract (MEC) Status: If the funding of a LIRP exceeds certain IRS limits, the policy could be classified as a Modified Endowment Contract. A Modified Endowment Contract (MEC) is a life insurance policy funded with premiums exceeding IRS limits, resulting in unfavorable tax treatment. Withdrawals and loans from a MEC are subject to potential income tax and early withdrawal penalties. In short, a MEC policy loses some of the tax advantages associated with non-MEC life insurance policies. 
• Premium payments: The amount an individual can contribute to a LIRP is generally determined by the policy's design, the insurance company's guidelines, and the insured’s financial capacity. Premium payments vary widely based on factors like the desired death benefit, the policy's cash value growth potential, and the insured’s age and health.

Can LIRPs replace traditional retirement plans?

It's important to note that while a LIRP provides a dual benefit of life insurance coverage and retirement savings potential, its effectiveness as a retirement strategy depends on various factors, including:

• Policy performance
• Premium payments
• Market conditions

A LIRP is meant to supplement traditional retirement vehicles like IRAs and 401(k)s, not replace them. Ideally, a person should have several sources of income that contribute to a strong retirement plan, such as:

• Salary from employment
• Pensions
• 401(k), IRA, and Roth IRA accounts
• Brokerage accounts
• Savings accounts

By integrating a LIRP into a broader financial strategy alongside traditional retirement accounts, individuals can harness the advantages of both approaches, optimizing their retirement readiness while safeguarding against unforeseen circumstances. Individuals considering a LIRP should carefully assess their financial goals, risk tolerance, and the specific policy terms to ensure it aligns with their unique circumstances.

Who is best suited for a LIRP?

Here are some characteristics that might make someone a good candidate for a LIRP:

• Maximized traditional retirement accounts: Individuals who have already maximized their contributions to traditional retirement accounts like IRAs and 401(k)s and are seeking additional avenues for tax-advantaged growth may find a LIRP appealing. Unlike qualified plans, there are no limitations to how much an individual can contribute to a life insurance policy, provided they adhere to MEC guidelines and the amount of coverage is financially justified with the carrier. 
• Exceeding income threshold for Roth IRAs: Individuals with a Modified Adjusted Gross Income (MAGI) over $153,000 in 2023 and married couples with a MAGI over $228,000 in 2023 cannot contribute to a Roth IRA. A LIRP strategy may provide a tax-advantaged alternative. 
• Long-term investment horizon: A LIRP is a long-term financial strategy that requires commitment. Those who commit to keeping the policy for an extended period can benefit from the compounding growth of the policy's cash value.
• The desire for tax-free income: One of the main attractions of a LIRP is the potential to access tax-free income during retirement. Individuals looking to supplement their retirement income with tax-free withdrawals may find a LIRP advantageous.
• Estate planning needs: Individuals with estate planning considerations, such as leaving a legacy to heirs or providing liquidity to cover estate taxes, may benefit from a LIRP. While a LIRP’s main focus is cash value accumulation and income, having the backstop of a death benefit can simplify estate planning. 
• Risk tolerance: A LIRP can be designed with guarantees and downside protection, making it suitable for individuals prioritizing wealth preservation and stability over higher-risk investment strategies.

Case study

John, age 45, is a real estate developer, and his wife, Pam, age 42, is a software engineer. Together, they have two children. They are both quite successful; between them, they make about $400,000 per year. They are both maxed out on their qualified plan contributions and are over the income limit to contribute to a Roth IRA. They feel comfortable with their current retirement assets but are looking at potential options to put away more money. 

John’s advisor approached him about a potential LIRP strategy. John likes the idea, and after discussion, he decides to apply for a life insurance policy* and plans to contribute an annual premium of $25,000 for 15 years. The initial death benefit is minimized so as to accumulate the most cash value. At age 61, the policy would provide approximately $62,291 of annual income each year until he’s 75. 

Structured properly, the life insurance policy will provide tax-deferred cash accumulation and tax-free income distributions that John and Pam can utilize during their retirement years. Further, if John were to happen to pass away prematurely, the policy death benefit would provide immediate liquidity to Pam and his two children. 

* Indexed universal life policy based on a male, age 45, preferred nonsmoker with an assumed crediting rate of 6.71%.

Next steps

Advisors looking for the best life insurance products for their clients to establish a LIRP should utilize a digital brokerage, which can provide several benefits:

• Access to multiple insurance providers: A digital brokerage can access a wide range of insurance companies whose life insurance products can be used in a LIRP arrangement. This allows advisors to compare different policies, features, and pricing from various providers, ensuring clients have a comprehensive view of their options.
• Efficiency and convenience: Digital brokerages streamline the application, underwriting, and policy issuance processes. Advisors can submit applications and required documentation electronically, reducing paperwork and administrative overhead. 
• Enhanced client experience: User-friendly interfaces allow advisors to explore policy options, review documents, and track the status of their applications online. This transparency and accessibility enhances the client experience and fosters trust between the advisor and the client. For example, Modern Life allows advisors to choose which carriers to share with a client, analyze different rate classes, and assess various product features to compare different scenarios while staying current on the latest rates by refreshing existing quotes.
• Remote collaboration: Digital brokerages facilitate remote cooperation between advisors and clients, like digitally sharing files and documents, making it possible to work together effectively regardless of distance. This is particularly valuable in today's digital age.
• Expert advice: A digital brokerage like Modern Life has a team of experts ready to help advisors and their clients navigate the insurance market. We help advisors draft cover letters, tailor coverage, and we have a medical team that can review health-related documents.  Fill in the form below to request a demo.