You know that life insurance was designed to provide financial support to your family when you’re gone. But did you know that it might also be able to provide a tax-preferred retirement income stream while you’re alive?
Life insurance retirement plans, or LIRPs, are based on the concept that many permanent life insurance policies have cash value that you can withdraw or borrow from. Here’s a look at how they compare to other retirement income solutions, as well as an overview of benefits and other considerations.
How are LIRPs different?
With a traditional IRA or 401(k), funding comes from pre-tax dollars, earnings grow tax-deferred, and distributions are taxable as ordinary income. A LIRP operates more like a Roth IRA or Roth 401(k), as it’s funded with after-tax dollars. Money withdrawn or borrowed from the policy usually isn’t taxable as income, as long as the policy doesn’t lapse and you leave a portion of the death benefit intact.
The death benefit itself usually passes to heirs free of income tax, and the LIRP strategy requires that the life insurance policy stay in force until the death of the insured to preserve the tax preference. Your tax advisor can provide more insights on how a LIRP may impact your tax picture.
Unlike most retirement accounts, a LIRP typically allows you to withdraw funds with no penalties at any time, for any reason, regardless of your age or how long you’ve had the policy. In addition, there are no contribution limits or income restrictions to qualify for a LIRP, unlike a Roth account.
4 advantages of a LIRP
On the other hand, the death benefit of a LIRP strategy can be accessed to help protect against the risks of an unforeseen event and provide the surviving spouse with assets to maintain their lifestyle. This benefit of transferring the risk of an unforeseen event is not available when saving in an IRA or 401(k) — annual additions would stop in this instance and the surviving spouse would have to adjust their lifestyle accordingly. In fact, many retirement plans factor in annual savings over your working years and may be impacted if something unexpected happens to the primary wage earner.
The combination of cash value and death benefit helps ease the burden of trying to determine exactly which financial goal to fund first — for example, retirement, future purchase or protection against premature death.
3 more facts about LIRPs
Is a LIRP right for you?
A LIRP isn’t necessarily right for everyone. Life insurance should not usually be used as your primary source of retirement savings, but rather as a supplement to offer additional layers of diversification. A LIRP should not be implemented if there is no need for death benefit protection and/or there is not sufficient projected cash flow to fund the required excess premium payments.
Still, a LIRP can be a very viable solution for certain clients and might be worth discussing as part of your retirement and financial planning. Your Hancock Whitney Financial Advisor can work with you to see if this strategy makes sense for you.
The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.
This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.
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