Saving for retirement typically involves a 401(k) plan through your employer, or an individual retirement account (IRA). You can also use a permanent life insurance policy with cash value, like whole life insurance, to build retirement savings.
Using a life insurance policy as an investment tool isn’t the best primary choice for retirement savings because it’s expensive and comes with more risk.
But if you’ve already maximized annual contributions to traditional retirement accounts and have income to spare, permanent life insurance may be a good supplemental option for you.
Life insurance vs. Roth IRA
Using life insurance to save for retirement is known as having a life insurance retirement plan (LIRP). This type of plan uses a permanent life insurance policy’s cash value component to help fund retirement.
An IRA is a retirement savings plan that you open and fund on your own. It’s one of the simplest ways to save for retirement.
IRAs are ideal for those without employer-sponsored plans, such as 401(k)s, but they can also be used in addition to other retirement savings.
Both LIRPs and IRAs are individually funded (with no involvement from your employer), so deciding between the two makes sense. But in most cases, an IRA is the best first choice between the two.
A LIRP might make sense if you already have an IRA and have been consistently reaching your annual contribution limit.
With a Roth IRA, you don’t pay taxes on withdrawals after age 59 ½ and cash gains are tax-deferred.
With a LIRP, you’d only pay taxes if you made a withdrawal from your policy that’s higher than your cost basis, in which case you’d pay taxes on the gains.
The difference between Roth IRAs and traditional IRAs is the tax structure. Traditional IRAs are taxed upon withdrawals, since they were funded with pre-tax dollars.
Roth IRAs are funded with after-tax dollars, so the entire account becomes tax-free when you reach retirement, as long as you make a qualified distribution (which means that the account is at least five years old and the account owner is at least age 59 ½).
One of the main tax benefits of whole life insurance, or any other type of permanent life insurance with cash value, is that the cash value grows tax-deferred.
Every time you pay a premium, part goes toward maintaining the policy, and the rest goes toward the cash value, which functions as a tax-advantaged savings vehicle. You can eventually withdraw from or borrow against your cash value, though it takes years to accumulate.
IRA vs. 401(k)
The main difference between an IRA and 401(k) is whether your employer is involved. An IRA is only available to individuals, similar to permanent life insurance, while 401(k)s are employer-sponsored and often offer some sort of employer matching.
401(k)s allow higher yearly pre-tax contributions than IRAs, but have fewer investment options.
See how life insurance compares with a 401(k) and Roth IRA below:
Tax comparison: LIRPs vs. traditional 401(k)s vs. Roth IRAs
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
How can permanent life insurance be used for retirement?
A cash value life insurance policy can supplement other retirement savings accounts, but we don’t recommend using life insurance as your main savings vehicle.
However, if you’ve reached the contribution limits for your 401(k) and IRA, here’s how putting money into your permanent policy’s cash value can be beneficial:
Pay extra premiums to fund your cash value
Overpaying your permanent policy’s premiums means the extra money paid goes into the cash value and grows tax-deferred.
But there are some caveats: you’ll be penalized on withdrawals before age 59 ½ and if you exceed the annual premium limit (set by the IRS) your policy converts into a modified endowment contract (MEC) (which means extra taxes and penalties for withdrawals.)
Use the cash value to supplement retirement
As a cash value life insurance policy owner, you can access the cash value in addition to your retirement accounts, allowing you to spread out retirement spending across multiple accounts.
For example, after a down year in the stock market, you can withdraw money from your policy’s cash value instead of drawing down from your IRA, which will replenish your IRA savings.
Long-term care support
Most life insurance policies allow for add-ons called riders, including a long-term care rider, which provides an accelerated death benefit.
These features cost more, but can be used as you age to pay for a nursing home or other medical costs related to long-term care.
Should you use life insurance as an investment?
If you maximize contributions to retirement accounts such as a 401(k) or IRA each year and don’t want to put additional funds into a traditional post-tax investment account, then using permanent life insurance to save can be a good option.
But if you’re trying to decide between opening an IRA (Roth or traditional) or opening a life insurance policy for the sole purpose of retirement savings, an IRA is almost always the better choice.
A Roth IRA offers higher returns on your contributions than cash value accounts. It’s much more straightforward than permanent life insurance, which can come with costly policy surrender charges, high premiums, and savings that aren’t guaranteed.
A Roth IRA also offers flexibility — if you fully fund it one year, but the next year you face unexpected financial hardship, you can choose not to fund it, and your existing contributions will still gain interest.
With a permanent life insurance policy, you must keep paying premiums, which are often several hundred dollars per month, or you risk your policy lapsing.
If you’re unsure if cash value life insurance fits into your financial goals and plans for retirement, speaking with a financial planner or Policygenius advisor can help.