Wondering how you can use life insurance to fund your retirement lifestyle? Here is a quick explanation and guide to retirement planning using a life insurance retirement plan.
Whole Life Insurance vs Term Life Insurance
Whole life insurance, or “permanent” insurance, is a type of policy that accrues value over time, as you pay premiums. Term life insurance is a policy purchased for a set number of years that only pays out if the insured dies within that term. If the insured outlives the term, that policy has no cash value.
There are several different types of whole life insurance and you should speak with a broker or agent to find out which type suits you and your expectations best. In general, you can cash out or borrow against your whole life insurance policy. If you take out no more than you put in in premium payments, those funds are not taxed.
What is a LIRP?
“LIRP” stands for Life Insurance Retirement Plan. It is a type of permanent insurance that provides returns that, while not reaching the highs of the stock market, are guaranteed. Other features can include:
- A guaranteed death benefit, tax-free to the beneficiaries
- The ability to borrow from those funds at an interest rate you set for yourself, tax-free
- The ability to lend from those funds at an interest rate you set
- Flexibility in premium payment amounts
- Tax-free income at any age in the form of periodic withdrawals as long as the amount deposited is not exceeded
- Availability of long-term care and chronic illness riders
People who want to invest more than the annual limits of a Roth IRA commonly use LIRPs as a retirement investment instead, because there are no deposit limits. Another benefit of a LIRP is that as long as an investor does not withdraw more than the amount deposited, those funds are not taxed. If the investor borrows against a LIRP, they can pay themselves back at whatever interest rate they wish, or not pay themselves back at all.
While a LIRP will not provide the gains that are possible in the stock market, the guaranteed “floor” or minimum gain makes a LIRP a conservative, reliable investment vehicle. And because a LIRP is funded by after-tax dollars, an investor can withdraw or borrow against it tax-free. Entrepreneurs can use their LIRP to fund venture after venture, all on their terms, or become a bank of sorts, lending money to friends or colleagues at some interest rate that is greater than the guaranteed return.
While a LIRP is not inexpensive, for those with sufficient funds to invest in one a LIRP can provide flexibility and a guaranteed return to help fund retirement years.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Chad Boonswang, Esq., a life insurance lawyer in Philadelphia.