While New York Life does not use this term, LIRP stands for life insurance retirement plan. Technically, a LIRP is not a retirement product in itself; instead, it’s a strategy that uses the cash value of a life insurance policy to help fund your retirement.
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Using life insurance for retirement planning
Since life insurance is primarily known for its death benefit protection, many people overlook the important role the cash value feature can play in helping you prepare for retirement. In this article, we’ll take a closer look at cash value life insurance and explore some of the reasons you should consider adding it to your retirement portfolio.
If you’re starting to think about retirement, there’s a good chance that you’ve considered IRAs, 401(k)s, annuities, and all the other well-known retirement savings vehicles. But have you ever thought about making life insurance part of your retirement portfolio?
What is a life insurance retirement plan (or LIRP)?
A life insurance retirement plan (LIRP) is a permanent life insurance policy that combines death benefit protection with a cash value component. The cash value can be used to supplement other retirement income sources or for any other purpose you choose. As you pay premiums into your policy, it builds cash value over time. You can make tax-free withdrawals up to the amount you've paid in premiums (your basis) at any time, and you can also take out loans against the cash value. These withdrawals and loans are generally tax-free unless the policy is classified as a Modified Endowment Contract (MEC), in which case different tax rules and potential penalties may apply.*
When you pass away, the death benefit is generally paid out tax free to your beneficiaries; however, the death benefit amount will be reduced based on the withdrawals and loans you took out that weren’t paid back. Also, keep in mind, LIRPs allow you to pay more premiums than required to maintain the death benefit. This helps you accumulate cash value in your policy quickly increasing the tax-free income available to you during retirement.
Life insurance for retirement can be an effective strategy
While New York Life does not use the term LIRP, we do recognize the important role cash value life insurance can play as you prepare for retirement. That’s because the cash value of a life insurance policy grows tax deferred within your policy and is a resource you can use to supplement your retirement income. Of course, when you access the cash value in a life insurance policy for supplemental retirement income, you will reduce the death benefit and the available cash surrender value. Since income taxes are paid only on withdrawals that exceed your basis, it’s important to consult your financial professional or tax professional and make sure the policy is structured the right way.
Does it make sense to use whole life insurance for retirement?
Since whole life insurance builds cash value, it can be an excellent choice for anyone interested in using life insurance for retirement planning. In particular, you may want to consider a Custom Whole Life policy since it gives you the ability to generate cash value even faster than a traditional whole life policy might.
Is there such a thing as investing in life insurance for retirement?
While life insurance is generally not considered an investment, a variable universal life policy does give you the opportunity to invest your cash value in a set of professionally managed investment options composed of underlying stocks or bonds. Of course, a variable universal life policy involves both upside and downside potential. If you would like to explore this type of coverage, be sure to speak with a financial professional who is licensed to sell securities.
Protect the value of your retirement assets
You may also be interested to know that the cash value of a life insurance policy can be an effective way to protect your retirement assets during a downturn in the market. How is that? Cash value can be accessed** for any financial purpose. Assuming that you’ve made a long-term commitment to the policy and have built up considerable cash value, you may be able to use this resource instead of selling other retirement assets when prices are depressed.
This sounds great. How much life insurance should I buy?
While each person’s needs are different, it’s important to remember that this strategy is designed to provide supplemental retirement income and should therefore be considered a complementary piece of your retirement portfolio. Here again, a New York Life financial professional can provide some valuable insight and help determine your policy needs.
How do I get started?
The best way to get started is to make sure you have all the information needed to make an educated decision. We recommend that you speak with a New York Life financial professional who can review all your options, answer all your questions, and make sure you know exactly which type of coverage makes the most sense for you.
Since the primary purpose of a life insurance policy is to provide death benefit protection, this strategy is best for people who think their coverage needs will decline later in life, and who have a long enough time frame to generate a significant amount of cash value. So, it is very important to consult a financial professional before taking any action.
If you have life insurance coverage through your workplace, you will most likely lose that benefit the moment you retire. And because most workplace policies offer term protection, there is no cash value associated with that coverage. If you purchase a whole or universal life policy on your own, however, you will enjoy long-term protection and continue to build cash value well into your retirement.1
If you plan on using life insurance to help fund your retirement, it’s important to purchase a policy that offers significant cash value appreciation potential as a feature. That means you will want to consider two types of coverage: whole life and variable universal life.2 A New York Life financial professional will be happy to review the advantages of each policy and help you decide which best meets your needs.
Whole life insurance is a good investment to supplement your retirement savings. These policies are insulated from market risk as compared with other retirement investments. If you decide to incorporate whole life into your portfolio, it’s best to do so early since it takes time to build cash value. Purchasing life insurance at a later age may not give you enough time to build the cash value you need to help with retirement.
To learn more about using the cash value of life insurance for retirement, or to discuss your retirement needs in general, please contact a New York Life financial professional today.
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*Certain tax advantages are no longer applicable to a life insurance policy if too much money is put into the policy during its first seven years, or during the seven-year period after a “material change” to the policy. If the cumulative premiums paid during the applicable 7-year period at any time exceed the limits imposed under the Internal Revenue Code the policy becomes a “Modified Endowment Contract” or MEC. A MEC is still a life insurance policy, and death benefits continue to be tax free, but any time you take a withdrawal from a MEC (including a policy loan), the withdrawal is treated as taxable income to the extent there is gain in the policy. In addition, if you are under 59 ½, a penalty tax of 10% could be assessed on those amounts and upon surrender of the policy.
**Accessing the cash value of a permanent life insurance policy will reduce the available cash surrender value and the death benefit.
1As long as all premiums are paid on a timely basis.
2Variable universal life insurance is offered only by prospectus. Please ask your registered representative for a prospectus containing more complete information about the policy, including investment objectives, strategies, risks, and charges. Please read the prospectus carefully before investing.
In most jurisdictions, the Custom Whole Life Insurance (issued by New York Life Insurance Company (NY, NY)) policy form number is ICC18217-50P (4/18). State variations may apply. Securities products are offered through NYLIFE Securities, LLC (member FINRA, SIPC), a New York Life Company.
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