How to Retire Flexibly: Life Insurance Retirement Plans (LIRPs) Are In Vogue
As life expectancy continues to climb across the world, more people are seeking flexible solutions when it comes to their life insurance. Increasingly, consumers are looking to forgo the longer guarantees of a traditional plan in favor of policies that offer more upside and the ability to utilize some of the funds prior to death.
One tool that’s gained traction in recent years is a Life Insurance Retirement Plan (LIRP). As the name implies, LIRPs are a vehicle designed to address multiple needs: the unpredictability of expenses during retirement, and also what comes after death.
LIRPS can be an ideal fit for many people today. For the most part, they require fewer upfront costs than traditional term-life insurance plans while providing more value and more control, including the ability to adjust them over time.
What exactly is a LIRP?
LIRPs are a type of permanent whole life insurance. The distinctive feature of a LIRP is a “cash value” component. When you open a LIRP, the policyholder also begins to accrue money in a savings account. This cash value portion is essentially a supplemental, tax-deferred retirement fund. And, unlike the death benefits most commonly associated with life insurance, policyholders can tap into those savings while they are still alive.
By offering a death benefit and a savings account in a single plan, LIRPs offer people more control and a chance to ensure long-term security for family members while also setting aside funds for unexpected expenses.
What’s the difference between a LIRP and a 401(k)?
There are key differences and advantages of each; let’s break it down:
| LIRPs | 401(k) |
| Key Differentiators | |
| Uses a cash value life insurance policy (typically indexed universal life) | Employer-sponsored retirement account
|
| Contributions made with after-tax dollars | Contributions are pre-tax |
| Tax-free withdrawals through policy loans | Taxed upon withdrawal |
| No annual contribution limits | Contribution limits set annually by the IRS |
| Provides a life insurance death benefit | Potential employer match |
| More flexible premium payments | Penalties for early withdrawal |
| Can access funds without early withdrawal penalties | Limited investment options |
| Potential market-linked growth with downside protection | |
| Key Advantages | |
| Tax-free income in retirement | Potential employer match |
| Permanent life insurance protection | Higher contribution limits |
| More flexibility in contributions | More straightforward investment options |
| Potential protection from market downturns | Established retirement vehicle |
Why Consider a LIRP?
Typically, LIRPs have shorter “guarantee durations” — the maximum amount of time that core pieces of a policy remain fixed, such as the cost of premium payments.
Any loss of guarantees sends fear through the spine of some consumers. But there are plenty of misunderstandings when it comes to LIRPs. They offer a range of benefits in comparison to traditional plans:
● Fewer opportunity costs: Clients are not “locked into” policy premiums to the same extent. Plus, if you do pay a higher premium, it can lead to better yields on the cash value portion of a LIRP.
● Better value: LIRPs offer the chance to accumulate more money than a traditional policy by investing some of the money into savings. Over time, these savings can provide an important supplement to retirement plans.
● Borrowing power: One common use of the cash value portion of a LIRP is to help policyholders secure a loan.
Especially in today’s fast-moving financial environment, LIRPs allow people to be flexible with their retirement and succession plans in order to meet life changes.
Who’s A Good Candidate for a LIRP?
LIRPs work best as a supplemental retirement strategy for high earners or someone seeking both protection and tax-advantaged retirement income. In general, LIRPs are not recommended for someone with limited income, short-term savings needs, or who doesn’t need (or want) life insurance.
Here are a few scenarios where a LIRP could be enticing:
● Maxed-Out IRAs: If a client has maxed out the contributions to their primary retirement vehicle, such as a Roth or traditional IRA, a LIRP can be another way of building wealth throughout retirement.
● Major Expenses: If a client is planning for a major purchase in retirement, such as a new house, but doesn’t know exactly when it’s coming, LIRPs provide another pool of (accruing) retirement income to fall back on.
● Business Owners: The payout from a LIRP may be protected from creditors, which can be a valuable layer of security for business owners who want to ensure they’re taking care of the next generation, no matter what happens to the business.
● General Uncertainty: Some people don’t know what retirement will look like yet, but they still want to get their affairs in order. A LIRP can help provide the security of a dedicated income source apart from the standard 401(k) or IRA plans.
As you work with clients seeking to maximize their retirement strategies, LIRPs can be a powerful supplemental tool. They’re especially valuable for high-income clients who have already maxed out traditional retirement accounts and are looking for additional ways to grow and access wealth tax-efficiently. While best suited for clients with a long-term outlook, a need for permanent life insurance, and the ability to fund the policy consistently, LIRPs are not a replacement for 401(k)s or IRAs. Think of them as a strategic complement for clients seeking more flexibility and tax advantages in their retirement planning.
Connect with your AIMCOR EIG sales team to learn more.