Life insurance retirement plans

You can use a cash value life insurance policy to supplement your retirement income, but this strategy comes with a few risks. Here’s what you need to know before making a life insurance policy part of your retirement plan.

Jennifer Pan

Jennifer Pan

Published January 27, 2020


  • A life insurance retirement plan (LIRP) is a financial strategy in which a cash value life insurance policy is used to supplement other retirement funds

  • Because cash value life insurance is expensive and complicated, life insurance retirement plans are not recommended for most people

  • Term life insurance, which doesn’t have a cash value component, cannot be used for a life insurance retirement plan

If you own a whole life insurance policy — or any other type of cash value life insurance — you can use your life insurance policy’s cash value to supplement your retirement income. This is known as a life insurance retirement plan (LIRP).

Some insurance agents tout this option as a major advantage of cash value life insurance. But while cash value policies sometimes offer flexibility in retirement planning, cash value life insurance also comes with risks that all life insurance shoppers — particularly those approaching retirement — should know about. Read on to see whether buying this type of insurance makes sense for your retirement strategy.

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How does a life insurance retirement plan work?

Any life insurance policy with a cash value, such as whole life insurance, can help fund retirement. (Term life insurance, which lacks a cash value component, cannot be used for a life insurance retirement plan).

What is the cash value of a life insurance policy?

The death benefit of a cash value life insurance policy works the same way as it does with term life insurance: The policyholder pays either a monthly or annual premium to keep the policy active. If the policyholder dies, their beneficiaries receive the death benefit, usually a tax-free lump sum of money.

With a cash value life insurance policy, a certain percentage of the premium you pay goes into an investment-like account called the cash value of the policy. The cash value is tax-deferred, meaning that you won’t pay any taxes on it as it grows.

You can access your policy’s cash value by withdrawing from it or taking out a loan against it, and that money can be used to help fund your retirement.

Overfunding life insurance

To build up enough cash value to supplement retirement, some policyholders choose to overfund their cash value life insurance policies by paying well over the required premium each month. The extra money they pay goes into the policy’s cash value and grows tax-deferred.

Using cash value to supplement retirement

Many financial experts recommend the “4% rule,” or drawing down 4% of your savings in each year of your retirement. When you own a cash value life insurance policy, you’ll have access to your policy’s cash value in addition to your retirement accounts.

This allows you to be strategic about your retirement spending. For example, after a down year in the market, you can withdraw money from your policy’s cash value instead of drawing down from your IRA, allowing your IRA savings to replenish.

Life insurance vs. 401(k)s and IRAs

Regardless of what kind of life insurance policy you decide to buy, dedicated retirement accounts such as a 401(k) or an Individual Retirement Account (IRA) should still be the primary way you fund your retirement.

  • A 401(k) is a retirement savings plan that employers offer to employees. Many employers also match a certain percentage of employees’ contributions to their 401(k)s.

  • An Individual Retirement Account (IRA) is a retirement savings plan that you open and fund on your own. IRAs can be used alone or in addition to an employer-sponsored 401(k).

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Pros of life insurance retirement plans

In some circumstances, a life insurance retirement plan can offer additional flexibility. Like a 401(k) or IRA, the cash value of an insurance policy is tax-deferred, but a cash value policy also has the following advantages:

  • There is no limit to how much money you can pay into a cash value policy, while 401(k)s and IRAs both have annual contribution limits.

  • Whole life insurance and certain other types of cash value life insurance often guarantee a floor for returns. That means that you won’t lose money during a market downturn.

  • There are no age restrictions on accessing the cash value of a life insurance policy, whereas you’ll pay a penalty for withdrawing money from a 401(k) or IRA before age 59½.

Cons of life insurance retirement plans

There are several reasons why relying on cash value life insurance for retirement isn’t recommended for most people:

Cash value policies can be prohibitively expensive

Whole life insurance policies cost, on average, 6 to 10 times more than comparable term life policies. According to one study conducted by LIMRA and the Society of Actuaries (SOA), nearly half of all whole life policies are surrendered within the first 10 years due to high cost.

Using a cash life insurance policy as part of your retirement strategy means you’ll continue to pay these high premiums in your retirement when your budget is likely more constrained.

Accessing the cash value is complicated

Accessing the cash value of a life insurance policy is much more complicated than withdrawing money from a savings or investment account.

Though you can technically withdraw from your cash value at any time, your insurer may have limits on how much money you take out, or charge administrative fees on withdrawals depending on how long you’ve held the policy. In many cases, withdrawing from your cash value will also reduce your policy’s death benefit.

You can also access your policy’s cash value by taking out a loan against your cash value. But, as with other loans, a cash value loan accrues interest until you pay it back. If you die before you pay it back, the amount you owe plus interest will be deducted from the death benefit.

You’re likely to get better returns on other investments

Whole life insurance and other cash value policies come with limited investment options and relatively low rates of return. Over the long run, dedicated investment vehicles such as a 401(k) or IRA will likely provide better returns than a whole life policy.

That’s why many financial advisors recommend that you “buy term life insurance and invest the difference” when it comes to life insurance.

Who needs a life insurance retirement plan?

Most people won’t need life insurance at all by the time they retire. That’s because as you get older, your financial obligations — such as paying off a mortgage or supporting dependents — usually decrease and so does your need for life insurance.

But using a cash value policy to supplement retirement income can make sense for people with more complex financial needs or people who know they’ll need life insurance coverage for the rest of their lives. These include:

  • High-income earners who have already maxed out their other retirement accounts and are seeking an additional vehicle for tax-deferred savings.

  • People with lifelong dependents, such as children with disabilities, who will still need life insurance coverage when they’re retired

A life insurance agent or an independent broker like Policygenius can help you figure out what kind of life insurance policy is right for you. You can get started by using our free quote comparison tool below.