When I meet with clients who are exploring life insurance options, one question that comes up frequently is about LIRP life insurance. If you’ve been researching retirement strategies or tax-advantaged wealth building, you may have come across this term. Let me walk you through what LIRP means, how it works, and whether it might make sense for your financial situation.
For a complete overview, see how the MPI strategy works.
What Is LIRP Life Insurance?
LIRP stands for “Life Insurance Retirement Plan.” It’s not a specific product, but rather a strategy that uses permanent life insurance—typically Indexed Universal Life (IUL) or Whole Life—as a tax-advantaged retirement income vehicle.
The basic concept is straightforward: you contribute more money to a life insurance policy than what’s needed to cover the insurance costs. This extra money builds cash value within the policy, which can grow tax-deferred. Later, you can access this cash value through policy loans to supplement your retirement income.
When I explain this to clients, I often use this analogy: think of it like having a retirement account that also happens to provide life insurance protection. The key difference is how the tax treatment works and how you access the money.
How LIRP Life Insurance Works
The mechanics of a LIRP strategy involve several moving parts:
The Accumulation Phase
During your working years, you make premium payments that exceed what’s needed for the life insurance coverage itself. This extra money goes into the policy’s cash value component, where it can grow tax-deferred.
With Whole Life policies, this growth typically comes from dividends (which aren’t guaranteed but have been paid consistently by many insurers for decades). With Indexed Universal Life policies, the growth is linked to market index performance—usually the S&P 500—but with a 0% floor that protects your principal from market losses.
The Distribution Phase
Here’s where the strategy gets interesting from a tax perspective. Instead of withdrawing money directly from the policy (which could create taxable income), you take policy loans against your cash value.
Think of your cash value like a bucket of water. When you take a policy loan, you’re not actually taking water out of the bucket—you’re borrowing against it. The bucket stays full, and that full amount can continue earning interest or index credits, depending on your policy type.
LIRP vs Traditional Retirement Plans
Let me share why some people find LIRP strategies appealing compared to traditional retirement accounts:
Tax Treatment Differences
With a 401(k) or traditional IRA, you get a tax deduction now but pay taxes on everything you withdraw in retirement. With a Roth IRA, you pay taxes now but withdrawals are tax-free later.
LIRP offers a different approach: your money grows tax-deferred, and when structured properly, policy loans are generally not treated as taxable income.
Let’s look at a practical example. Say you have $1 million saved for retirement:
- Traditional 401(k): Using the 4% rule, you might withdraw $40,000 annually. After taxes, you’re looking at maybe $32,000 take-home—about $2,700 per month.
- LIRP Strategy: Depending on how it’s designed, you might be able to access $60,000-$80,000 annually through tax-advantaged policy loans.
Contribution Limits
Your 401(k) has annual contribution limits—$23,000 for 2024 if you’re under 50. LIRP strategies don’t have government-imposed contribution limits, though there are IRS guidelines about how much you can put into a life insurance policy relative to the death benefit.
Access to Your Money
With traditional retirement accounts, you generally can’t access money before age 59½ without penalties. LIRP gives you access to your cash value at any age through policy loans.
The Benefits of LIRP Life Insurance
When properly implemented, LIRP strategies can offer several advantages:
Tax Diversification
Most people have the majority of their retirement savings in tax-deferred accounts like 401(k)s. Having some money in a tax-advantaged life insurance strategy can provide tax diversification—giving you options for how to manage your tax burden in retirement.
Principal Protection
This is especially relevant with Indexed Universal Life policies. The 0% floor means that even if the S&P 500 drops 30% in a given year, your cash value won’t decrease due to market performance. You might earn 0% that year, but you won’t lose principal.
When the market goes down and those index options expire worthless, you only lost the gravy, not the steak. Your principal was never in the market—it was sitting safely in the insurance company’s general fund the whole time.
Death Benefit Protection
Unlike other retirement vehicles, LIRP provides life insurance protection for your beneficiaries. Even if you’ve borrowed against most of your cash value, there’s still a death benefit that can help protect your family.
Flexibility
LIRP strategies often provide more flexibility than traditional retirement accounts. You can adjust premium payments (within limits), access cash value when needed, and don’t have required minimum distributions at age 73 like traditional IRAs.
Important Considerations and Limitations
I always want to be upfront with clients about the realities of any financial strategy. LIRP isn’t perfect, and it’s not right for everyone.
Time Commitment Required
This is not a short-term strategy. Life insurance policies typically have surrender charges in the early years. If you need to cancel the policy within the first 10-15 years, you could lose money. LIRP works best when you can commit to funding it consistently for decades.
Complexity
LIRP strategies are more complex than putting money in a 401(k). The policies need to be properly designed to maximize cash value accumulation while staying within IRS guidelines. Working with someone who truly understands these strategies is essential.
Performance Variables
With Indexed Universal Life policies, your returns depend on index performance, subject to caps and participation rates. While you have downside protection, your upside is also limited. Some years you might earn 12%, other years you might earn 0%.
Cost Structure
Life insurance policies have internal costs—insurance charges, administrative fees, and other expenses. A properly designed policy minimizes these costs relative to the cash value accumulation, but they’re still there.
Is LIRP Right for You?
In my experience, LIRP strategies tend to work best for people who:
- Are already maximizing other retirement savings options
- Are in higher tax brackets and want tax diversification
- Have a long time horizon (at least 15-20 years)
- Want principal protection with growth potential
- Need life insurance anyway and want to maximize the policy’s efficiency
- Can commit to consistent premium payments
LIRP typically doesn’t make sense if you:
- Haven’t maximized employer 401(k) matching
- Need access to your money in the short term
- Want the simplest possible approach to retirement saving
- Are uncomfortable with the complexity of life insurance
- Understand that LIRP (Life Insurance Retirement Plan) is a strategy using permanent life insurance policies like Whole Life or Indexed Universal Life to build tax-advantaged retirement income, not a specific insurance product.
- Contribute more than the minimum premium needed for coverage to build cash value that grows tax-deferred within the policy during your working years.
- Access your retirement funds through policy loans rather than withdrawals to potentially avoid taxable income, while your full cash value continues earning growth.
- Compare LIRP’s tax treatment to traditional retirement accounts, as it offers tax-deferred growth with potentially tax-free access, unlike 401(k)s that are taxed upon withdrawal.
- Consider that LIRP strategies require careful planning and may work better for certain financial situations, so evaluate whether this approach aligns with your specific retirement goals.
The Bottom Line on LIRP Life Insurance
LIRP can be a powerful addition to a comprehensive retirement strategy when properly implemented and when it fits your specific situation. The combination of tax-advantaged growth, principal protection, and flexible access to cash value offers benefits that traditional retirement accounts don’t provide.
However, it requires commitment, proper design, and realistic expectations about performance and costs. Like any financial strategy, the devil is in the details—and those details matter enormously.
What good is saving your whole life to build a retirement account if it wasn’t designed to produce good income and could leave you living month to month in retirement? That’s the question that leads many people to explore alternatives like LIRP.
If you’re interested in learning whether a LIRP strategy might make sense for your situation, I’d be happy to walk through the numbers with you. Every situation is different, and what works well for one family might not be the right approach for another.
Finding the right retirement strategy doesn’t have to be complicated. As an independent agent, I work with multiple top-rated carriers and can help you compare options to find the best approach for your needs and goals.
Related Reading
- Indexed Universal Life Insurance Pros and Cons
- Policy Loan Life Insurance: What You Should Know
- Benefits of IUL: What You Should Know
- MPI Investment: What You Should Know
Let me help you explore your options. I’ll analyze your current retirement strategy and show you how different approaches—including LIRP—might impact your retirement income.
