Life Insurance Retirement Plans: What They Are and How They Work
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Growing the wealth you’ve earned and providing for loved ones are important financial goals for many people. Life insurance retirement plans offer an opportunity to do both at the same time. These plans provide a tax-advantaged way to make investment gains and pass on savings, but they may not be the right move for everyone.
We at the MarketWatch Guides team created this resource to help you determine whether an LIRP is a smart financial choice for your situation. You’ll learn how LIRPs work, what types of plans are available from the best life insurance companies, and what you need to consider before making a decision.
What Is a Life Insurance Retirement Plan?
A life insurance retirement plan is a permanent type of life insurance policy that builds cash value and provides a death benefit. Common LIRPs include whole life and universal life policies.
In our 2025 survey of 1,000 life insurance policyholders, more than half of the respondents told us they had some form of permanent life insurance that can be used for retirement planning. Among all respondents, 44% said they had a whole life insurance policy, making it the most popular type. Universal life insurance was the second-most popular type of permanent life insurance policy, with 10% of respondents indicating they had that type of coverage.
How Do Life Insurance Retirement Plans Work?
As you pay the premiums for an LIRP, a portion of each payment is placed into a savings account, known as the cash value component. The cash value life insurance policy can grow over time, either from interest or investment returns, depending on the type of policy. Up to a certain point, this growth is tax-deferred.
LIRPs are not intended to replace more traditional retirement accounts like Roth IRAs and 401(k)s. Instead, they can be a way to use a life insurance policy as part of your retirement plan.
Pros and Cons of LIRPs
Life insurance retirement plans offer unique benefits compared to other policy options, but there are also downsides to consider.
Pros
Potential for faster and bigger portfolio growth than other policies
Policyholders can make tax-free withdrawals from accumulated cash value
Most policies don’t have maximum contribution caps
Cons
Contributions to LIRPs are not tax-deductible
LIRPs have higher costs than other investment options
Tax benefits only apply up to certain amounts of cash value
Funding Your Retirement With an LIRP
The key to funding your retirement with an LIRP is building the cash value of your plan. There are a few things to keep in mind when trying to maximize the value of an LIRP.
You Can Overfund Your LIRP
A life insurance retirement plan is considered overfunded if you pay more premiums than are required. This portion of the premiums constitutes the cash value, which is held in a tax-deferred savings account. The more funds you have in your account, the more it can grow from investments and the more capital you can access through loans or withdrawals.
There Is a Maximum Contribution Limit
Be aware, however, that the IRS sets a limit on the amount of cash you can contribute to a LIPR before it’s considered a Modified Endowment Contract. To avoid being considered a MEC, an LIRP must pass this “seven-pay test” used by the IRS, which stipulates that premiums paid within the first seven years of an active life insurance policy cannot exceed the amount required to pay a policy in full.
Once a life insurance plan is classified as a MEC, tax advantages for withdrawals and loans are erased, and the cash value becomes less accessible. The designation of MEC cannot be reversed.
There Are Restrictions on Withdrawals From LIRPs
You can make tax-free withdrawals and loans before age 59 and a half, as long as the withdrawal amount is less than the premiums you’ve paid. However, after this age, withdrawals of any amount from an LIRP are tax free.
Like all life insurance products, the face value of the policy is paid out, tax-free, to your beneficiaries in the event of your death. The death benefit would be reduced by any loans or withdrawals you had previously taken out and not replaced or paid back.
LIRPs vs. Traditional Retirement Plans
Like LIRPs, traditional retirement plans—including 401(k)s, Roth IRAs and annuities—are designed to help you build the savings you need for retirement. Brokerage accounts are not specifically designed for retirement savings, but can provide a valuable supplement to retirement funds, especially if you’ve maxed out your retirement contributions.
According to our research, LIRPs are more versatile than traditional retirement savings options because of their dual role of distributing death benefits and building retirement income. And like a Roth IRA, they allow tax-deferred cash gains and tax-free withdrawals after age 59 and a half. Of these options, only the LIRP provides a death benefit payable to your beneficiaries.
Above all, retirement planning requires taking an integrated, individualized strategy. If you have any questions about your retirement and how to plan for it, we suggest consulting a financial advisor.
Types of Life Insurance for Retirement Planning
Only cash-value life insurance plans can be used in retirement planning. This includes permanent life insurance policies like whole life, universal life and variable life.
- Whole life insurance: These plans are the most common form of permanent life insurance coverage, providing a fixed face value or death benefit for your entire life and building cash value at a fixed interest rate.
- Universal life insurance: Unlike whole life insurance, universal life insurance policies offer flexible interest rates, which can mean greater cash accumulation in favorable market conditions and slower returns in poor conditions.
- Variable life insurance: This is the riskiest form of permanent life insurance because the policyholder chooses their own investments. The cash value in a variable universal life insurance policy is not guaranteed, and the policyholder could lose money if the investments perform poorly.
- Indexed life insurance: These life insurance policies are tied to an entire market index, such as the S&P 500 or NASDAQ. This means that the cash value of an indexed life insurance policy grows and shrinks based on the performance of that index as a whole.
- Term life insurance: Unlike a permanent life insurance policy, term life insurance policies have no cash value and cannot be used as a source of retirement savings. Therefore, term life policies are best for those looking for a cheap life insurance option.
What To Consider When Using Life Insurance for Retirement Planning
For many, LIRPs can be a part of an effective retirement planning strategy. There are a few things to think about when looking into a life insurance policy for retirement, including:
- Your life insurance budget: Make sure LIRP premiums fit comfortably within your monthly budget. Failure to keep up with payments can result in a loss of your policy and funds invested in it.
- Amount of death benefits: All life insurance plans provide a death benefit payout for beneficiaries listed in the policy. Providers may limit the amount, but you have some say over your coverage. The death benefit should factor in your loved ones’ likely financial needs.
- Cash value component: The only types of life insurance policies that can be used as LIRPs are those with a cash value feature. That means permanent life policies like whole life and universal life insurance—not term life plans.
- Overpayment option: You can pay more than your required premiums to build your cash value more quickly, giving you a source of funds to withdraw or borrow from and increasing the amount of returns on investment gains.
- Type of policy: Whole life, universal life, variable universal life and indexed life insurance policies are all options for LIRPs. Each uses a different investment model and has distinct requirements and restrictions.
- Your premium factors: Your choice of policy, as well as your personal health, lifestyle, and occupation affect your premiums. Some rating factors, such as using tobacco and alcohol or getting regular exercise, are within most people’s control. Working toward a healthier profile can lower premiums.
- Age of underwriting: Life insurance premiums are almost always cheaper the younger you are when you sign up for a policy. Consider the effect of opening a policy now versus waiting for what may feel like a better time.
- Insurer rates: Even if you request quotes for the same coverage, you’ll likely get different prices from different life insurance companies. We recommend getting quotes from at least three providers to compare as a way to find cheaper life insurance.
Who Needs a Life Insurance Retirement Plan?
An LIRP doesn’t make sense for everyone, but for many, it can provide enough benefits to justify the cost. You might want to consider an LIRP if you fall into any of the following categories:
- High net-worth individuals: Wealthy people whose investment goals exceed the maximum limits of their other retirement savings accounts can benefit from LIRPs.
- People who are supporting dependents: Those with family members who rely on them for financial support or need long-term care may also benefit from an LIRP. For these situations, the death benefit would provide the funds necessary to support the family members upon the insured person’s passing.
- Earners with ambitious financial goals: LIRPs can be incorporated with traditional retirement savings accounts to build a more aggressive, robust savings plan.
FAQ: Life Insurance Retirement Planning
Here are some frequently asked questions about life insurance retirement plans and how LIRPs work:
Life insurance can be a component of smart retirement planning. Permanent life insurance plans offer the dual purpose of death benefits and a tax-advantaged savings and investment account. These plans have higher costs and typically fewer advantages than traditional retirement investment vehicles, but the advantages they provide can make them a valuable component of a well-rounded retirement strategy.
Both a 401(k) and life insurance can serve as important investment tools, but a 401(k) is specifically designed for retirement. LIRPs are better for estate planning since your loved ones receive a death benefit if you pass away.
Planning for retirement well in advance can give you ample time to plan, save and build a cushion for making investment mistakes. Starting the process early also allows time for your retirement fund to grow and earn interest as you continue to work.
Cash value life insurance plans can enhance your savings from more traditional retirement plans like IRAs and 401(k)s. However, they are not generally relied upon as the sole source of retirement income. If you’re looking for a versatile product that offers several benefits, cash value life insurance could be a sensible option.
*Data accurate at time of publication.