What is a Life Insurance Retirement Plan (LIRP)? Learn how to use permanent life insurance to build tax-free income and secure your retirement.
What Is a Life Insurance Retirement Plan (LIRP)?
A LIRP is a retirement strategy that uses the cash value of a permanent life insurance policy to create tax-free income in retirement. While the policy provides a death benefit, its cash value grows tax-deferred and can be accessed tax-free through withdrawals and policy loans.
How Does Cash Value Work?
Unlike term life insurance, permanent life insurance includes a savings component. Each premium payment is split into two parts:
- ☂ Cost of Insurance: Covers the death benefit (like term life)
- 💰 Cash Value: Accumulates in a tax-advantaged account
Cash value can grow based on fixed interest, dividends, or market-indexed returns—depending on the policy type (whole, universal, or indexed universal life).
How to Use LIRP in Retirement
Once your policy has built sufficient cash value, you can access it tax-free using:
- Withdrawals: Up to the amount of premiums paid (your cost basis)
- Policy Loans: Borrow from the cash value without triggering taxes
- Long-Term Care Benefits: Some policies offer riders to use cash value for LTC costs
These features allow LIRP to function like a Roth IRA alternative, especially for high-income earners.
LIRP vs Roth IRA vs 401(k)
| Feature | LIRP | Roth IRA | 401(k) |
|---|---|---|---|
| Tax-Free Growth | ✅ | ✅ | ❌ (tax-deferred only) |
| Tax-Free Withdrawals | ✅ (if structured properly) | ✅ | ❌ |
| Contribution Limit | ❌ No IRS limit | ✅ $7,000 (2025 est.) | ✅ $23,000 (2025 est.) |
| Early Withdrawal Penalty | ❌ (via loans/withdrawals) | ✅ (after 59½) | ✅ (after 59½) |
| Death Benefit | ✅ | ❌ | ❌ |
Who Should Consider a LIRP?
LIRPs are best suited for:
- ✅ High earners who’ve maxed out 401(k), HSA, and IRA contributions
- ✅ Those seeking additional tax-free retirement income
- ✅ Families who want both legacy protection and tax-efficient cash access
For example, a 40-year-old making $250,000/year and already contributing the maximum to qualified plans may use a LIRP to diversify tax buckets and build future income.
Are There Downsides?
- 💸 Higher premiums than term life
- 📉 Returns may vary (especially in market-linked policies)
- 📋 Requires long-term commitment and careful design (overfunding needed)
LIRPs aren’t ideal for everyone — but with proper setup, they offer powerful flexibility for retirement and estate planning.
Key Takeaways
- ✅ LIRP = permanent life insurance + tax-free retirement strategy
- ✅ Access funds tax-free through loans and withdrawals
- ✅ No IRS cap on contributions unlike traditional retirement accounts
- ⚠ Requires careful planning to avoid policy lapse or tax issues
