Maybe you’ve heard of using life insurance to supplement retirement income—but is it a smart move, or a slick sales pitch?
If you’re a high-income earner and already maxing out your 401(k) or IRA, cash value life insurance with its tax advantages offers a tremendous way to accumulate money for retirement.
This guide explains life insurance retirement plans (LIRP), how they work, and when they make sense. We show you the best life insurance companies available and help you navigate underwriting should you have a high-risk medical condition.
What Is a Life Insurance Retirement Plan (LIRP)?
A Life Insurance Retirement Plan (LIRP) strategy uses indexed universal life insurance (IUL) or whole life insurance as a tax-advantaged way to build and access money during retirement.
You can’t use term life insurance because term life does not build cash value.
Tax advantages are the core of LIRPs, providing:
- Income tax-free death benefit
- Tax-advantaged loans
- Tax-deferred cash value accumulation
Here’s the core idea: You overfund a life insurance policy, allowing the excess premiums to grow on a tax-deferred basis. In retirement, you can access the cash value of the policy for retirement using policy loans. Loans are tax-free as long as the policy stays in force, and the loans do not have to be paid back.
Why High-Income Earners Look at LIRPs
Most traditional retirement accounts come with contribution limits, income caps, and penalties for early withdrawals. That’s where life insurance can fill a gap.
A LIRP offers:
- No IRS contribution limits
- No income restrictions
- Access to cash before age 59 1/2 without penalty
- Income-tax-free loans (if structured right)
- An income tax-free death benefit for your beneficiary.
This can be especially useful for business owners, doctors, and others who have inconsistent incomes, don’t have pensions, or want to supplement other retirement accounts.
How the Tax Advantages Work
The appeal of life insurance in retirement planning is the tax benefits.
Unlike traditional retirement plans, there are no required minimum distributions (RMDs), and the policy doesn’t count toward your modified adjusted gross income (MAGI), which helps if you’re trying to avoid higher Medicare premiums or Social Security taxes.
The Pros and Cons of LIRPs
- Pros:
- Tax-free income in retirement
- No RMDs or early withdrawal penalties
- Market downside protection (IULs often have 0% floors)
- Death benefit for beneficiaries
- Can be used for chronic illness coverage with riders
- Cons:
- Policy may not perform as illustrated.
- Must be designed to avoid a Modified Endowment Contract (MEC) status
- Requires long-term commitment and premium funding.
- Poorly managed policies may lapse and create taxable income.
- Loans reduce the death benefit if not repaid.
If you buy a policy for supplemental retirement income, you have to commit to it. Otherwise, you will lose much money to these policies’ surrender charges in the early years.
When a Life Insurance Retirement Plan Makes Sense
Ideal candidates for life insurance retirement planning are people who:
- Are in their 30s to 50s age range (the policies need time to work)
- Have extra cash to invest beyond traditional 401 (k) or IRA products.
- Want to hedge against future tax increases
- Want diversification and flexibility from other investments
- Want a policy that provides living benefits.
It’s not right for everyone, but this is a powerful tool in the right hands.
What to Avoid
Things to look out for include:
- Policies designed as a modified endowment contract (MEC) – tax advantages are lost.
- Single-carrier agents—You want an agent who will match you to the best company rather than assigning all clients to the same company.
- Set It and Forget It – These policies must be monitored and managed annually.
Request an illustration from us to see how these plans work. With our service, there is never any pressure or obligation.
FAQ
A LIRP strategy uses permanent life insurance—typically indexed universal life (IUL) or whole life—to build cash value on a tax-deferred basis. That cash value can later be accessed tax-free via policy loans, providing supplemental retirement income.
Not necessarily. A 401(k) has an employer match and lower fees, but LIRPs offer tax-free income, no RMDs, and access before age 59½. They work best for people who’ve already maxed out traditional accounts.
High-income earners, business owners, and people in their 30s to 50s with extra savings are looking for tax diversification and future income flexibility.
Risks include high fees, poor policy design (e.g., MEC), or underperformance. If loans aren’t appropriately managed, the policy could lapse and trigger taxes.
Yes, if structured correctly. You can take tax-free withdrawals up to your basis and access additional funds through policy loans that are not taxable income.
Final Thoughts
A life insurance retirement plan isn’t for everyone, but when appropriately designed, it offers flexibility, tax advantages, and long-term security that most traditional plans can’t match.
If you’re serious about retirement planning and want to see if a LIRP makes sense for your goals, let’s talk. We’ll review your options, show you the good and the bad, and help you make a decision you won’t regret.
Get a personalized retirement plan quote and discover if life insurance belongs in your future—or if there’s a better path forward.
