401(k) down big? Take a look at LIRPs

Life insurance retirement plans may be a good option for retirement savings — if you’ve maxed out other retirement accounts.

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a certified personal finance counselor and former senior reporter at Policygenius, where he covered insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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If you haven’t checked your 401(k) for the past six months (and you probably shouldn’t), you’re in for a bad surprise. The S&P 500 has fallen by 20% since the start of the year, and analysts say stocks have yet to hit bottom. The bear market has some people looking for other places to stash their retirement money, and it’s raised interest in life insurance retirement plans, or LIRPs. A LIRP uses the cash value of a whole life insurance policy to supplement your retirement income. 

Search traffic for “LIRP” has spiked since May, in the midst of the current stock market slide. Videos about life insurance retirement plans have amassed nearly 200 million views on TikTok, many of which paint them as ways to accumulate wealth without mentioning their downsides.

While LIRPs aren’t a retirement panacea, they can offer tax advantages to people who have already maxed out other tax-advantaged retirement accounts. They also offer some risk.

How does a life insurance retirement plan work?

Any permanent life insurance policy with a cash value, like whole life insurance, can help fund your retirement as a LIRP. With cash value life insurance, part of your premium goes into a tax-deferred savings component. The policies can be structured in many different ways. With some policies, you contribute for a set time, like until you retire. Others require you to contribute a set amount each year until you die. 

The returns on the savings component can vary as well. Some put a floor on performance, so you can never lose money, but set a limit on returns. Other LIRPs include investments in mutual funds, so their value can go up and down like a 401(k)

What are the pros of a life insurance retirement plan?

One of the biggest benefits of a life insurance retirement plan is the ability to borrow from it tax-free, says Clint Haynes, a certified financial planner and founder of NextGen Wealth. This may reduce your death benefit if you don’t pay back the loan, so it’s only a good option for people with no dependents. 

LIRPs usually have no contribution limits, and you can defer taxes on your contributions until you retire, when you’ll likely be in a lower tax bracket

What are the cons of a life insurance retirement plan?

Many whole life insurance policies make you wait before you can cash out, or else you have to pay a penalty. They also come with fees that can be “quite sizeable,” Haynes says.

“Factoring in the fees it could be 10, 15, 20 years before you start to come out ahead,” he says.

Because of this, you have to be willing and able to commit long-term to make it worthwhile.

Who should get a life insurance retirement plan?

When it comes to saving for retirement, a life insurance retirement plan should not be a top priority. You should first prioritize things like:

  1. Emergency savings

  2. Investing enough in your 401(k) to get a full employer match

  3. Making the maximum annual contribution to a Roth IRA if you’re eligible

  4. Making the maximum annual contribution to a 401(k)

  5. Other savings goals like paying for your children’s college education or buying a house

“It has to be for somebody in a very specific circumstance that has already checked those boxes beforehand,” Haynes says.

And as a life insurance product, term life insurance is more appropriate for most of the population, Haynes says. A LIRP makes sense for people with enough income who are looking for alternative ways to save money long-term. That’s why it’s a good idea to talk to a financial expert like a financial advisor or insurance agent before diving in.

What can you do if you’re worried about your retirement savings?

Remember that retirement is a long-term investment. The market may look bad over a six-month time horizon, but over the decades, it’s tended to bounce back from even severe downturns. In the short-term, worries about inflation or even the latest popular songs can swing the market, but the smart money is on sticking to your long-term plan.

Image: Sarah Mason / Getty Images