Most people save for retirement with a 401(k) plan offered by their employer or a Roth IRA. These types of accounts are popular investment options because of their predictable returns and relatively low cost.
Some permanent life insurance policies also offer a way to save for retirement — it’s an option called life insurance retirement plan (LIRP), where the cash value from the permanent policy is used to supplement retirement income.
A LIRP can make sense for high-income earners with dependents who need lifelong financial support. But a 401(k) is a better retirement investment than a (LIRP) for most people due to LIRP’s high premiums and a low return on investment.
Should I use life insurance instead of a 401(k) for retirement?
You shouldn’t add life insurance to your retirement planning until you maximize potential savings in a 401(k) plan or IRA. For some high-net-worth individuals, adding a permanent life policy to their investment portfolio may make sense. For most people, just having a 401(k) should meet their needs.
Using life insurance as a retirement plan has two advantages over a 401(k).
Guaranteed interest: Most policies offer at least a minimum interest of 0%, which 401(k) investments don’t have. This can protect you from losses during an unexpected stock market downturn.
Liquidity: You can access the cash value of a policy at any time, whereas 401(k) withdrawals before age 59-½ will trigger a 10% penalty and income taxes. Life insurance vs 401(k) 
But the disadvantages usually outweigh any benefits of using life insurance to save for retirement.
High fees: Management fees are often much higher than you’d find in a 401(k). Average fees for a 401(k) are approximately 0.57%,  whereas expenses and fees for a permanent policy like indexed universal life insurance can be 3% and up.
High premiums: A $500,000, 20-year term policy costs around $39 per month for a 40-year-old who doesn’t smoke and is generally in good health. A $500,000 whole life policy for that same profile — which is one of the types of policies you’d include as part of a retirement plan — would cost $671 per month.
Low rates of return: Recent research found that over a nine-year period, employee 401(k)s grew by an average of 15.6% per year.  Compare that to a fixed interest rate of 2%-3% on a permanent life policy.
These differences add up over time. Applied to $50,000 in savings, the fees above would equal $285 per year in a 401(k) vs. $1,500 per year with life insurance.
In the same vein, you could see investment growth of $7,950 a year at 15.6% interest with a 401(k) compared to $1,500 per year at 3% interest, and you’d spend $855 more on life insurance each month to have whole life coverage.
For most people, getting permanent life insurance as part of a retirement plan is not a good idea. Even if you get a LIRP, it should supplement your 401(k), not replace it.
Who should consider using life insurance as part of their retirement savings?
People who are maximizing contributions to their retirement account each year — that’s $22,500 ($30,000 if you’re age 50 or older) for 401(k)s and $6,500 ($7,000 if you’re age 50 or older) for Roth IRAs in 2023 — may consider a LIRP. 
It also makes sense to factor in a LIRP if you also need lifetime coverage for estate tax or family care reasons, like an adult child who qualifies as a dependent.
The majority of people don’t need to use life insurance to supplement their retirement savings. Because permanent policies are five to 15 times more expensive than term life policies, it’s much more cost-effective to invest in a separate retirement account or post-tax investment account and buy affordable, easy-to-cancel term life insurance coverage.
What types of life insurance are commonly used for retirement planning?
Life insurance retirement plans (LIRPs)
A life insurance retirement plan (LIRP) refers to any permanent life insurance policy where the cash value account is used to supplement retirement savings. Term life insurance can’t be used as a LIRP because it doesn’t have a cash value account.
Below are two common types of permanent life policies that can be used as a LIRP.
Whole life insurance
Traditional investment accounts typically offer higher returns and more flexibility than whole life insurance, but whole life can provide a relatively low-risk supplement to these retirement savings methods, as long as you’re confident you can afford the premiums for the lifetime of the policy — or in this case, until retirement.
Indexed universal life insurance (IUL)
Indexed universal life insurance offers a standard death benefit and cash value that grows based on a stock market index, such as the S&P 500. The insurer chooses which index funds are available and the policyholder chooses how the money is allocated.
This type of life insurance usually has a floor of 0%, so you don’t lose money, but your interest rates aren’t fixed. You’ll take on much more investment risk than you would with other life insurance products.
If you’re considering buying an IUL policy to supplement retirement savings, you should speak with a financial advisor first, since these products are complex and premiums are high.
How are life insurance retirement plans taxed?
If you make a 401(k) withdrawal before age 59 ½, it’ll trigger a 10% tax penalty on your distribution, in addition to income tax. 
Unlike a 401(k), there’s no tax penalty for withdrawing from your cash value account before a certain age. But, any withdrawals from your cash value will be treated as taxable income, much like a qualifying 401(k) withdrawal.
LIRP (cash value life insurance)
Varies by insurer
$22,500 (+$7,500 if older than 50)
$6,500 ($7,500 if older than 50)
How you contribute
Premiums (after-tax dollars)
After-tax dollars with no tax deductions
How your money grows
(Penalty-free) withdrawal qualifications
In most cases, none*
59½ years old and up
59½ years old and up and an account at least five years old
Only if your withdrawal exceeds cash value base amount
Taxed as regular income
No income taxes
Required minimum distributions
Varies by policy premiums
73 years old and up
What’s the best way to save for retirement?
A 401(k) is always a better choice than a life insurance policy. Even if you would benefit from a LIRP, you should maximize contributions to your 401(k) and other retirement accounts before investing in life insurance alternatives.
LIRPs require you to own a permanent life insurance policy, which is significantly more expensive than term life insurance coverage. Most people don’t need to spend that extra money and will save more by instead investing in traditional retirement funds and buying a more affordable term life policy if there’s a need for coverage.