What Is a Life Insurance Retirement Plan (LIRP)?

A life insurance retirement plan, often called a LIRP, is a way to use a permanent life insurance policy’s cash value alongside traditional retirement accounts. The policy can provide lifelong protection for your family in the event of your death, and its cash value can grow over time. After the policy has been in force for several years, you may be able to access that cash value through loans or withdrawals to supplement retirement income (subject to policy rules and tax considerations).

A life insurance retirement plan isn’t a replacement for traditional retirement accounts like 401(k)s or IRAs, and it isn’t right for everyone. But for some people, especially those who want permanent coverage and additional flexibility, it can be a useful complement to life insurance for retirement income support. Below, we’ll explain how LIRPs work, the policy types involved, the pros and cons, and how to evaluate whether a retirement life insurance strategy fits your goals and budget.

How LIRPs Work: Cash Value Strategy and Policy Types

Using life insurance for retirement uses the cash value inside a permanent life insurance policy to sit alongside your 401(k) or IRA as a supplement to those traditional retirement accounts. You pay premiums on the policy, including an amount to help fund the cash value, which grows tax-deferred. After the policy has been in force for some time, the cash value should be substantial enough for you to take loans or withdrawals (as long as you have funded it appropriately). You can use this cash value growth to help supplement retirement income.(Access cash value will reduce death benefit)

Permanent Life Insurance Types 

Here’s a quick comparison of how each type handles premiums, growth, and risk:

Whole life:

Premiums are fixed for life, and cash value grows based on the guarantees in the contract. If the policy is “participating,” it may also pay non-guaranteed dividends. Growth is steadier and more conservative.

Universal life:

Premiums are flexible within the policy’s rules, and you may also be able to adjust the death benefit as your protection needs change. Interest is credited at a declared rate set by the company, usually with a minimum guaranteed rate. This flexibility can be helpful, but if you underfund the policy or if cost of insurance rises, your cash value can shrink and coverage can be at risk unless you increase your premium payments.

Indexed universal life:

Interest is credited based, in part, on the performance of a stock market index, but you don’t invest directly in the stock market. Upside growth can be limited by caps, and policy charges still apply, so actual growth depends on both index results and costs.

Variable universal life:

Cash value is invested in “subaccounts,” which are similar to mutual funds. Values can rise or fall with the market. Potential growth is higher, but so is volatility and the impact of ongoing fees. Even in years with a high market return, ongoing policy and investment fees can slow growth over time.

Cash Value Accumulation and Access, Explained

• Cash Value Accumulation

  You pay one premium, and each premium payment is generally “split” into two parts when received by the insurance company. The first part is applied to the cost of insurance and other policy expenses. The second part is applied to the cash value, which generally grows tax-deferred. For example, let’s say your monthly premium is $300. $200 of that covers the cost of insurance, policy fees, and charges. The other $100 goes directly into your cash value. Cash value builds gradually, just like with any savings account. Also, many policies have surrender charges in the early years, which could negatively impact cash value.

• Accessing cash value

  You can typically access your money in two ways – either via a withdrawal, where you take money out of the policy with no intention of repaying it, or via policy loans, which may or may not be repaid.

  Withdrawals may be tax-free up to your ‘basis’ (generally, premiums you’ve paid). Amounts above basis may be taxable. Tax treatment varies, so consider speaking with a tax professional. It’s also important to know that any withdrawal can reduce the policy’s value and death benefit.

  Policy loans let you borrow against your available cash value without a credit check, and loan interest accrues. Any unpaid balance reduces the death benefit and cash value. You could owe income tax on reportable gain if a policy lapses or is surrendered with a loan outstanding; a tax professional can speak to your situation.

If you overfund the policy, it can become a Modified Endowment Contract (MEC). MEC status changes how withdrawals and loans are taxed and can reduce flexibility for income planning. Careful funding and periodic reviews help you avoid an unintended MEC. Because taxes and policy mechanics can be nuanced, consider reviewing your plan with a qualified tax professional before relying on a LIRP for income.

*Please note, this material is for educational use only and is not tax, legal, or investment advice. Tax treatment depends on individual circumstances and may change. You should consider consulting a qualified tax professional if you are considering a LIRP or if you have tax questions about other retirement accounts.*

Benefits of Using a LIRP for Retirement

​​A life insurance retirement plan can pair long-term protection with cash value you may tap into later. The benefits of retirement life insurance strategies are primarily flexibility, tax-advantaged treatment, and long-term financial protection.

Key Advantages

• Lifelong coverage: The policy can stay in force for your whole life if you keep it funded, so your family has protection while you build savings.
• Tax-deferred growth: Tax-deferred growth may improve long-term results versus a fully taxable account, depending on returns, fees, and your tax situation
• Flexible access: Many policies allow loans or withdrawals in retirement. Used carefully, this can help you manage income in later years.
• Lower-volatility choices: Whole life and some UL designs emphasize guarantees and steadier crediting for people who have a lower risk tolerance.
• Legacy planning: The death benefit can help with final expenses, estate liquidity, or charitable goals.
• Design options: You can choose a policy that emphasizes guarantees, flexibility, or growth potential based on your comfort with risk.

Tradeoffs and Best Fit

LIRP insurance is not for everyone. A permanent policy that emphasizes guarantees, such as whole life or guaranteed universal life (GUL), may be a better fit for some seniors. For any life insurance policy you are considering purchasing, you should review the common trade-offs and see where it fits best.

Key trade-offs and risks for LIRPs

• Higher ongoing costs can slow early growth.
• Steady funding matters; underpaying can shrink cash value and put guarantees at risk.
• Permanent policies designed to build substantial cash value are more complex and will benefit from periodic reviews.
• Variable sub accounts can lose value and may require higher premiums to keep coverage on track.
• Overfunding can trigger MEC rules, which make withdrawals and loans less tax-friendly.
• Surrendering early can be costly and may create taxable income if there’s gain.

A LIRP can be a good fit if you…

• Need permanent coverage and can fund it consistently over many years.
• Are already contributing to workplace plans and IRAs and want an additional long-term “bucket” that can grow tax-deferred.
• Are willing to review the policy regularly to ensure it’s properly funded.

Consider alternatives to a LIRP if you…

• Mainly want the lowest-cost death benefit for a set period (term life usually fits better).
• Haven’t yet maximized tax-advantaged accounts.
• Prefer simple, low-maintenance investments and don’t want to manage policy mechanics.

LIRP vs. Other Retirement Strategies

An LIRP is intended to complement, not replace, other retirement accounts. Here’s a quick side-by-side to see where each shines. You should always discuss tax treatment with a financial advisor or tax professional.

* Triple tax advantage means contributions are tax-deductible (or pretax via payroll), earnings grow tax-free, and withdrawals for IRS-qualified medical expenses are tax-free. Non-medical withdrawals are taxable and, if taken before age 65, usually incur a 20% penalty; after 65 they’re taxed as ordinary income without the penalty. Rules are set by the IRS and can change. Review IRS guidelines or consult a tax professional.

How to fit it together

• Prioritize employer match and Roth/Traditional IRA opportunities first.
• Use a LIRP when you also want permanent coverage and are comfortable with long-term funding.
• Revisit frequently (at least annually) to confirm premiums, cash value, and any loans are tracking to plan.

How to Evaluate and Set Up a LIRP

If you decide a LIRP may be a good fit for you, follow this simple setup checklist to design funding within guardrails (and avoid MEC status). Keep these steps in mind when speaking with a licensed insurance agent.

Step-by-step setup

1. Confirm your goals and protection needs. Decide how much permanent coverage you actually need and what you plan to use it for and how much you can afford.
2. Maximum fund traditional retirement accounts first. Make steady progress on 401(k)/IRA/HSA contributions before adding a policy for supplemental retirement planning.
3. Choose a policy type that fits your risk comfort. You may consider whole life for stronger guarantees, UL for flexibility, IUL for indexed crediting with caps/floors, or VUL for market exposure with higher risk.
4. Design funding within guardrails. Work with the insurer to target premiums that support your goals while avoiding MEC status.
5. Review any illustrations carefully. Look at guaranteed and non-guaranteed columns, charges, and the impact of loans under different market or crediting scenarios. Note that illustrations are not guarantees – outcomes depend on funding, costs, and actual performance.
6. “Stress-test” the plan. Ask for alternate assumptions (lower crediting rates, higher costs, down markets) to see how funding and values hold up.
7. Decide on riders you truly need. Examples include accelerated death benefit, chronic illness, or waiver of premium.
8. Plan how you’ll access cash value later. Understand how withdrawals up to basis work, how loans accrue interest, and what could trigger taxes or a lapse.
9. Set an annual check-in. Review premiums, cash value, loan balances, and performance. Adjust funding if needed to keep the policy healthy.
10. Know your exit options. If your needs change, ask about reduced paid-up coverage, 1035 exchanges to another policy, or a surrender, making sure you understand tax implications and potential penalties, costs, or fees.

*Note on taxes and rules:**Policy mechanics and tax treatment can be nuanced. Consider speaking with a qualified tax professional and your insurer before relying on a LIRP for retirement income.*

Summary & Next Steps

A life insurance retirement plan uses the cash value inside a permanent life policy to sit alongside your 401(k) or IRA. It pairs lifelong protection with a savings component you may be able to access later through withdrawals and policy loans. The fit comes down to your goals, budget, time horizon, and comfort managing a policy over many years.

If you need permanent coverage and you’re funding traditional retirement accounts, an LIRP can add flexibility. If you mainly want the lowest-cost death benefit for a set period, term life and regular investment accounts are usually a better match. You can learn more about both permanent and term options at Ethos! Get started today to explore your options.