Guide: How To Use Life Insurance for Retirement (LIRP)

Using a life insurance policy with a cash value can provide another income stream during retirement. However, this is a more complex form of retirement saving that you’ll want to approach carefully.

Retiring requires various financial strategies to build financial security and comfort. One of those strategies can be a life insurance for retirement plan (LIRP). These plans are whole or universal life insurance policies, which offer both a death benefit and help you build cash value. Part of the premium you pay for your life insurance goes into a savings account that will grow tax-deferred until you draw from it, offering a retirement income source.

If you want your beneficiaries to have the necessary income to help cover your final expenses while also accessing another income stream, here’s why you might consider one of these plans.

How to Use Life Insurance for Retirement 

Using life insurance as a part of your retirement income has many nuances to it. There are a variety of ways to use these accounts to offer savings. Here’s a look at how to grow your funds tax-deferred using a life insurance plan.

1. Contribute Extra Toward the Cash Value

This is known as overfunding the cash value of the account. That way, your funds can grow at faster than anticipated rates. You’ll still only be growing your funds at the pre-determined interest rate that you agreed to when you set up the account. But you’ll have more in the account to pull from when the time comes.

2. Take Out a Loan from the Cash Value

One perk of using life insurance during retirement is that it can help fund a large purchase, such as a roof replacement or HVAC work on your home. You can take out a loan against the cash value in your life insurance plan. You’ll enjoy a tax-free lump sum from your life insurance retirement plan. Just be sure your loan does not exceed the total premiums you’ve paid into the policy or your policy could no longer be in force and that loan won’t be tax-free.

3. Withdrawals

You can withdraw funds from your account to use as emergency funds. This will reduce the cash value in the account but it might be worth it to help make ends meet or complete a large purchase. The good news is that withdrawals are often tax-free so long as you don’t exceed the cost basis for the plan. But if you do, those withdrawals will be subject to income tax. 

What Type of Life Insurance is Best for Retirement?

As you shop for a LIRP that will provide income during your retirement days, make sure you’re looking into a policy with cash value. Those are the only ones that will provide income during retirement. These four types of life insurance are the best ones for creating unique funding scenarios for your retirement needs.

• Whole life insurance: You’ll enjoy permanent life insurance coverage with this plan, including a death benefit that never expires. You can build cash in the policy that will grow based on a fixed interest rate that you agree to when you purchase the policy. Conservative planners who want to know with more certainty regarding their retirement funds find this to be the best option.
• Universal life insurance: These policies work much like whole life insurance except that you’ll enjoy flexible interest rates, offering greater cash accumulation when market conditions are better. However, when market conditions are not good, your returns will be poor.
• Variable life insurance: Those who are risk-averse should avoid this form of life insurance because you’ll be choosing your investments. There is no guaranteed cash value, and poor management of the account’s investments could result in significant losses. 

Should You Use Life Insurance for Retirement?

Planning for retirement requires many considerations as you evaluate how much you need to retire. Here are the pros and cons of incorporating a life insurance policy into your retirement budgeting.

Pros of Using Life Insurance for Retirement 

• Keep contributing to retirement after maxing out contributions: If you’re currently maxing out your contributions to your retirement accounts but want to enjoy tax-deferred growth on your savings, consider adding in a life insurance retirement plan.
• Estate taxes: If you’re looking for ways to reduce the cost of estate taxes for your beneficiaries, placing your funds in a life insurance policy could help because they won’t pay estate taxes on those funds.
• Manage taxes in retirement: When you’ve done a great job saving for retirement and anticipate that you’ll be in a higher tax bracket once you retire, using a life insurance policy can help reduce your tax burden through tax-free income.
• Long-term care: When you purchase a life insurance policy, you might be able to get a long-term care rider, which aids in covering the expenses of this type of care.

Cons of Using Life Insurance for Retirement 

• Complex: Life insurance payouts have many intricacies and taxation on them requires extra attention. You can also only withdraw funds under certain circumstances and scenarios.
• Fees: You’ll pay fees for your life insurance policy, meaning all the money you pay you won’t be able to pull out. That money sitting in an account for you will be charged regular fees, further decreasing the account’s cash value.
• Limited liquidity: Because the money is in a life insurance policy and not a more traditional retirement account, you can only withdraw the funds during certain circumstances or you’ll pay surrender charges and penalties. The money is especially not liquid in the early days of your policy.
• Medical exam: Most life insurance policies require that you undergo a medical exam for underwriting purposes. This will make setting up this account more time-consuming than any other retirement account. And if you have certain preexisting conditions, you might not be able to get a life insurance policy. 
• Limited growth: Your money could likely earn better interest if you invested it in another vehicle. While it can provide peace of mind and a simple place to put retirement savings for some, those with investment know-how find that their money has greater opportunity elsewhere. 

Diversify Your Retirement Income

Using life insurance as a form of retirement income can be wise because it offers a diversified income stream with its own set of tax benefits. It’s especially good for those who have maxed out their retirement contributions elsewhere and want to continue saving toward their retirement goals or provide inheritance to their beneficiaries tax-free. Weigh the pros and cons of this retirement income source to decide what might be best for you.

Frequently Asked Questions