A Life Insurance Retirement Plan (LIRP) involves using a life insurance policy to obtain money in the future for retirement or other life events. The policyholder pays premiums that grow tax-free and can later access the accumulated cash value by taking withdrawals and policy loans*.
As long as the policy continues, withdrawals are tax-free. Additionally, the cash value grows more efficiently because the minimum amount of death benefit required is purchased, which reduces the policy's cost.
Life insurance policies come in two primary forms: permanent life insurance and term life insurance. Cash value life insurance is a type of permanent life insurance. Additionally, it has a savings aspect to it that is similar to a savings or investment account but grows tax-free over time.
For each premium payment, a percentage of the fee is allocated to a tax-deferred, investment-type savings component, known as the policy's cash value. The precise amount that goes into savings depends on your policy. As you continue to pay premiums, the cash value account increases tax-free over time.
With a LIRP, you have more flexibility to add to your retirement fund. Rather than pulling funds only from your retirement accounts or Roth IRA, you can take out money from your policy's cash value*. In times after the stock market takes a downturn, this can be a helpful way to give your Roth IRA a chance to recover.
Meet our client, Melanie. Melanie is a 45-year-old physician who wishes to save more money for her retirement at age 65.
Each year, she contributes the maximum amount allowable to her qualified plan and finds this is insufficient to meet her retirement income needs.
Melanie has considered purchasing mutual funds and other securities but would prefer a more tax-efficient way to save.
Melanie purchases a permanent life insurance policy with a minimum amount of death benefit and pays planned premiums of $50,000 a year until her retirement in 20 years.
At her retirement, she is able to draw $121,500 a year tax-free from the policy via a combination of tax-free withdrawals and loans for 20 years, assuming a policy crediting rate of 5.3%
Melanie is able to save more for her retirement, leading to more income that she can use to supplement her qualified plan withdrawals. The premiums Melanie pays grow tax-free inside the policy and, after her retirement, she can take money from the policy via tax-free loans and withdrawals. At her death, Melanie's children can share in the policy's remaining death benefit that will be paid income tax-free.
Our financial planners at Finley Davis focus on managing your goals, not just your money. Let us help you determine whether a LIRP is the right choice to meet your retirement income goals. To set up a consultation, give us a call or contact us online.
Hypothetical example for illustrative purposes only. Actual results will vary
*Loans and withdrawals reduce death benefits payable. Loans subject to interest rates charged by the issuing company.