A Life Insurance Retirement Plan or LIRP Can Maximize Tax-Free Income and Protect Loved Ones

A Life Insurance Retirement Plan, or LIRP, is a specially designed life insurance policy that does much more than just provide a death benefit.

A LIRP is a permanent life insurance plan that simulates many of the tax-free traits of the Roth IRA. A properly funded LIRP can provide large, tax-free, streams of income during the policyholder’s retirement years.

There is no income limit to a LIRP — unlike a Roth IRA, there are no earned income limits. This means high-income individuals can also participate in a LIRP strategy.

In this article, we will take a broader look into how this plan works and see an example of how much tax-free income is possible.

What is a LIRP, or Life Insurance Retirement Plan?

A life insurance retirement plan, commonly referred to simply as a LIRP, is a type of permanent life insurance policy that builds cash value – some call it an overfunded life insurance policy or 7702 plan. Unlike most other permanent life insurance policies, though, that are purchased for their death benefit protection, a LIRP is used more for its cash value and retirement income potential. The cash value can be accessed tax-free for the purpose of supplementing your retirement income.

There are two types of permanent life insurance policies that are used for creating a LIRP. These are:

While whole life insurance policies can provide a viable framework for a LIRP, it is universal life insurance that can typically provide the best LIRP platform. Specifically an index universal life insurance policy. One reason for this is because universal life policies are more flexible than whole life insurance.

See this article if you need a refresher on the types of life policies.

LIRP Pros and Cons

Although LIRPs can offer a source of tax-free retirement income, there are some potential drawbacks to consider as well, depending on your goals for the policy.

ProsCons
Tax-deferred build-up of the cash valueHigher premium than term life insurance
Tax-free retirement incomePossible slower growth compared to equities
No annual funding limitsMay require ongoing contributions
Death benefit for survivorsHave a surrender charge in early years
Penalty-free access for long-term care needsContributions are not tax deductible

Is a LIRP right for you?

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The Power of “Tax Preferral”

Life insurance can be a powerful addition to your overall financial plan. But not just for its death benefit – which, by the way, is income tax free to the beneficiaries. Life insurance policies can provide additional advantages, such as:

  • Tax-deferred growth
  • Tax-free income
  • Other qualifying non-taxable distributions