How to Use Life Insurance to Fund Your Retirement | Best Types & Tips

 

Life insurance is a contract between you and an insurance company that promises to pay a sum of money to your beneficiaries when you die. Life insurance can provide financial protection and peace of mind for you and your loved ones, especially if you have dependents, debts, or estate taxes.

But life insurance can also be more than just a death benefit. It can also be a source of income for your retirement, if you use it wisely. There are different types of life insurance, such as term life insurance, whole life insurance, universal life insurance, variable life insurance, etc. Each type has its own features, benefits, costs, etc.

In this article, we will explain how to use life insurance to fund your retirement and what are the advantages and disadvantages of this strategy.

Life Insurance Retirement Plan (LIRP): What It Is and How It Works

A life insurance retirement plan (LIRP) is a retirement strategy that uses the cash value component of permanent life insurance policies to help fund retirement. A LIRP is not a specific type of life insurance policy, but rather a way of using any permanent life insurance policy for retirement purposes.

Permanent life insurance policies are life insurance policies that provide coverage for your entire life, as long as you pay the premiums. They also have a cash value component that grows over time and can be accessed through loans or withdrawals. The cash value is separate from the death benefit and can be used for any purpose.

A LIRP uses the cash value component of permanent life insurance policies to create a tax-advantaged retirement income stream. A LIRP mimics the tax benefits of a Roth IRA, meaning you don’t pay taxes on any withdrawals after you are 59 ½ years old and cash gains are tax-deferred.

To use a LIRP, you need to buy a permanent life insurance policy and pay more than the minimum premium required to keep the policy in force. The excess premium goes into the cash value and accumulates over time. When you retire, you can withdraw or borrow from the cash value to supplement your retirement income.

For example, suppose you buy a universal life insurance policy with a $500,000 death benefit and pay $10,000 per year in premiums. After 20 years, your cash value grows to $300,000. When you retire at age 65, you can withdraw or borrow $20,000 per year from the cash value tax-free until you deplete it or die.

LIRP: Who Needs It and How Much

Not everyone needs or can benefit from a LIRP. And not every permanent life insurance policy is suitable for a LIRP. To determine whether you need a LIRP and how much coverage you need, you need to consider some criteria and factors.

The main criterion for needing a LIRP is whether you have maxed out your other tax-advantaged retirement accounts, such as 401(k)s, IRAs, Roth IRAs, etc. A LIRP is usually considered as a last resort or an additional option for retirement savings after you have exhausted your other options.

The main factors that determine how much coverage you need for a LIRP are:

• Your income: This affects how much premium you can afford to pay into your policy and how much income you will need in retirement.
• Your expenses: This affects how much income you will need in retirement and how long your cash value will last.
• Your assets: This affects how much income you will have from other sources in retirement and how much death benefit you will need to leave behind.
• Your liabilities: This affects how much debt you will have to pay off in retirement and how much death benefit you will need to leave behind.
• Your goals: This affects how much income you want to have in retirement and how much death benefit you want to leave behind.

To estimate how much coverage you need for a LIRP, you need to consider some factors, such as:

• The cost of buying and maintaining the policy: This includes the premiums, fees, interest, and charges that you will have to pay for your policy. You should choose a policy that has low costs and high returns on your cash value.
• The growth rate of your cash value: This includes the interest, dividends, or investment returns that your cash value will earn over time. You should choose a policy that has high growth potential and low risk exposure for your cash value.
• The withdrawal or loan strategy: This includes the amount, frequency, and timing of your withdrawals or loans from your cash value. You should choose a strategy that maximizes your income, minimizes your taxes, and preserves your death benefit.

To calculate how much coverage you need for a LIRP, you can use some methods, such as:

• A formula: This is a mathematical equation that uses some variables and factors to determine the coverage amount. For example, you can use the following formula: Coverage amount = (Retirement income - Other income) / Withdrawal rate. The withdrawal rate is the percentage of your cash value that you plan to withdraw or borrow each year.
• A rule of thumb: This is a general guideline that uses a percentage or a multiple to determine the coverage amount. For example, you can use the following rule of thumb: Coverage amount = Annual income x 10 to 20. The range of 10 to 20 is used to account for different levels of income and expenses in retirement.
• A professional assessment: This is an evaluation by an expert or a consultant who can analyze your situation and your goals and provide a customized recommendation for the coverage amount.

To help you calculate and compare your LIRP needs and costs, you can use some tools, such as:

• Online calculators: These are online tools that can help you estimate your coverage needs and costs based on some inputs and assumptions. For example, you can use this online calculator from Policygenius.
• Comparison websites: These are online platforms that can help you compare quotes and offers from different insurance companies and products. For example, you can use this comparison website from Quotacy.
• Agents or brokers: These are professionals who can help you find and apply for the best policy for your needs and goals from a variety of companies and products. For example, you can contact an agent or a broker from Policygenius.

LIRP: Types and Options

The type and option of permanent life insurance policy you choose for a LIRP can affect your coverage amount and how it works. There are different types and options of permanent life insurance policies, such as:

• Whole life insurance: This is a type of permanent life insurance that provides coverage for your entire life, as long as you pay the premiums. It also has a guaranteed cash value that grows at a fixed rate of interest. It also pays dividends that can be used to increase your cash value or reduce your premiums. Whole life insurance is usually the most expensive and rigid type of permanent life insurance, but it provides guaranteed coverage, cash value, and dividends.
• Universal life insurance: This is a type of permanent life insurance that provides coverage for your entire life, as long as you pay the premiums. It also has a flexible cash value that grows at a variable rate of interest. It also allows you to adjust your premiums, death benefit, and cash value within certain limits. Universal life insurance is usually less expensive and more flexible than whole life insurance, but it provides less guarantees and more risks for your coverage, cash value, and interest.
• Variable life insurance: This is a type of permanent life insurance that provides coverage for your entire life, as long as you pay the premiums. It also has an investment-based cash value that grows or declines based on the performance of the underlying investment options. It also allows you to choose from a variety of investment options with different risk-reward profiles. Variable life insurance is usually the most expensive and complex type of permanent life insurance, but it provides the most growth potential and control for your cash value.

The type and option of permanent life insurance policy you choose for a LIRP can affect your coverage amount and how it works in different ways. Some of the factors to consider are:

• Duration: Whole life insurance can help you cover lifelong needs, such as leaving a legacy or funding a charitable donation. Universal life insurance or variable life insurance can help you cover temporary needs, such as paying off a mortgage or funding a business venture.
• Cost: Whole life insurance can help you lock in a lower premium rate for life, especially if you buy it when you are young and healthy. Universal life insurance or variable life insurance can help you lower your premium rate by adjusting your death benefit or cash value.
• Flexibility: Whole life insurance can help you simplify your planning by providing fixed and guaranteed benefits. Universal life insurance or variable life insurance can help you customize your planning by providing flexible and variable benefits.

To choose the right type and option of permanent life insurance policy for your LIRP, you need to weigh the pros and cons of each type and option and decide which one suits your needs and goals. You can also use online tools or contact agents or brokers to help you compare different types and options of permanent life insurance policies and find the best one for you.

LIRP: Tips and Best Practices

Using a LIRP effectively and efficiently can be challenging, but not impossible. You just need to follow some tips and best practices to avoid common pitfalls and mistakes and make smart decisions. Some of the tips are:

• Shop around for the best rates and terms: You don’t want to pay more than you need to for your LIRP policy or settle for a policy that does not meet your needs and goals. You should compare quotes and offers from different insurance companies and products and find the best value for your money.

• Review your policy regularly: You don’t want to keep a policy that is outdated or irrelevant to your current situation. You should review your policy at least once a year or whenever there is a significant change in your income, expenses, assets, liabilities, goals, etc. You should update your coverage amount, premium, cash value, or investment options as needed.
• Communicate and document your policy: You don’t want to cause confusion or conflict among your beneficiaries or heirs regarding your LIRP policy. You should communicate and document your policy clearly and transparently with your spouse, children, business partners, accountant, lawyer, etc. You should also keep a copy of your policy in a safe and accessible place.

Conclusion

Retirement planning is a crucial process that can affect your financial security and peace of mind. You need to have a retirement plan that meets your needs, goals, budget, and preferences.

Life insurance can be more than just a death benefit. It can also be a source of income for your retirement, if you use it wisely. A LIRP is a retirement strategy that uses the cash value component of permanent life insurance policies to create a tax-advantaged retirement income stream.

To use life insurance to fund your retirement, you need to consider who needs it and how much, what type and option to choose, and how to buy and use it effectively.

You can also use online tools, comparison websites, agents, brokers, or financial planners to help you with this process.

Remember, the right life insurance policy for you is the one that meets your needs, goals, budget, and preferences. So don’t delay and get started today!