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Life Insurance in Retirement Planning

— August 18, 2020

Whole Life insurance premiums and the policy’s attendant fees tend to be much higher than those of Term Life policies, however, you are paying for more benefits, features, and greater flexibility.

Have you heard that there are circumstances under which a life insurance policy can help fund your retirement lifestyle? This guide will explain how and when a life insurance policy can figure into your retirement planning.

What Types of Life Insurance are There?

There are several variations on these two general types of life insurance, unique to each insurance company: Term Life Insurance, and Whole Life Insurance.

Term Life Insurance

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.

Term Life Insurance can be bought in just about any amount depending upon what you wish to insure, what you can afford, and what the insurance company thinks is insurable. For example, a young professional with a family might have more than one policy, a larger policy for a 20-year term to ensure the children’s minority and education expenses, and a smaller 30-year policy to provide income replacement for the spouse or partner.

Even someone with no need to provide insurance proceeds to loved ones, such as a retiree with an adequate pension and investments for him or herself and spouse or partner, might take out a small $5,000 or $10,000 policy to cover funeral and other end-of-life expenses.

Whole Life Insurance

Also called “permanent” life insurance, whole life is a type of insurance policy that accrues value over time as you contribute to it in the form of premium payments, and the balance accrues interest. Generally, you can borrow against or withdraw from your whole life insurance policy, and if you borrow no more than you put in in premium payments, those funds are not taxed.

There are many variations of whole life insurance available. You should speak with a broker or agent to find out which type might suit you and your expectations about guaranteed payouts, interest accrual, and lending or withdrawal features. 

Whole Life insurance premiums and the policy’s attendant fees tend to be much higher than those of Term Life policies, however, you are paying for more benefits, features, and greater flexibility. For some, this is valuable despite the cost.

What is a LIRP?

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Public domain image by Karen Arnold, courtesy of CC0

A “LIRP” is a Life Insurance Retirement Plan, which is a type of whole or permanent life insurance that provides guaranteed returns and a guaranteed death benefit, along with the following other features and flexibility:

  • You can borrow from your policy tax-free, and set the interest rate yourself;
  • You can lend to others from those funds, again at an interest rate you set;
  • You have flexibility in the number of premium payments you pay;
  • Valuable riders such as those for long-term care are available.

A LIRP can Provide Tax-Free Income at Any Age

Unlike withdrawals from your Roth IRA, you can withdraw from your LIRP tax-free at any age, as long as the withdrawals do not exceed the amount you contributed. 

You Can Contribute Any Amount to a LIRP

If you have the ability and desire to invest more for retirement than the annual limits of a Roth IRA allows, you can use your LIRP as an additional investment vehicle and there are no limits on deposits. 

Granted, a LIRP will not provide you with the gains that are possible in the stock market. However, a guaranteed “floor” or minimum gain makes a LIRP a safe and reliable investment of the money in excess of the annual deposit limits of your retirement account.

You Can Use Your LIRP to Invest in Business Ventures

Entrepreneurs have used their LIRPs to fund venture after venture, all on their terms as they set the loan’s term and interest rate. Imagine charging a rate of interest that exceeds your LIRP’s floor! 

You Can Lend to Friends, Family, or Colleagues from Your LIRP

In the alternative, your LIRP can act as a bank if you want to lend money to friends or colleagues at some rate of interest that exceeds the LIRP’s guaranteed returns.

While a LIRP is not inexpensive, for those with sufficient funds to invest in one a LIRP can provide a guaranteed return to help fund retirement years, a guaranteed death benefit for your loved ones, and the flexibility to borrow and lend against the account and increase your return.

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