How Life Insurance Retirement Plans (LIRPs) could help increase your retirement income

Nelson Rivera, CPA | Head of Insurance | Citizens Private Wealth

_{As Vice President and Insurance Services Manager, Nelson’s primary focus is working with financial advisors to develop strategies that protect family assets, income, and lifestyle to help clients navigate in changing circumstances.}

While you might be more familiar with retirement savings tools like IRAs and 401(k)s, some life insurance plans offer you the opportunity to create an additional income stream. A financial strategy that includes a life insurance component could boost your retirement income above and beyond Social Security and withdrawals from personal and employer retirement plans.

Let's explore the types of life insurance plans that can complement your retirement and when it may make sense for you.

Term vs. permanent life insurance

Life insurance comes in two main types: term and permanent. Both types pay a tax-free death benefit if you pass away while the policy is in force. The primary differences are the length of the policy and whether or not it can gain cash value.

With term life insurance, you purchase a policy for a fixed death benefit, premium and term — typically 10, 20 or 30 years. These terms don't build cash value, and coverage ends promptly when the term ends unless you extend or convert it ahead of time.

Permanent life insurance can stay in effect for as long as you live if you're up to date on the premiums. Premiums and the amount of the death benefit vary depending on the type of policy you purchase. With permanent life insurance, your premium payments may help you build cash value — investment earnings that add to your death benefit that you can access if needed while you're alive. Life insurance retirement plans (LIRPs) allow you to use the cash value for loans, withdrawals, surrender or even to pay the policy's premiums.

Types of LIRPs

LIRPs bring life insurance and retirement together through the cash value feature of permanent life insurance. As you make premium payments, your cash value increases based on the policy's terms, and growth is tax-deferred. At retirement, you can access your cash value to generate extra income or pay for various expenses. The total death benefit to be paid to your beneficiaries is simply reduced by the amount of cash-value withdrawals you've made.

When planning to use life insurance during retirement, you'll typically use one of three types of permanent policies:

• Whole life insurance. Whole life insurance tends to offer policyholders the lowest amount of risk. You'll have a set death benefit and a fixed premium that will never increase. With every premium payment, a portion goes into your cash value account and accumulates value based on your policy's terms. If you prefer a simple policy that accumulates cash value, this could be a policy to consider.
• Universal life insurance. Similar to whole life, universal life insurance uses part of your premium payment to build cash value. These policies tend to have more flexibility than whole life but slightly more risk. With some policies, you can potentially increase your death benefit if you pass a physical exam. It may also be possible to modify your premium payments based on the balance in your cash value account. However, if you use up your cash balance on cost of insurance and other charges, your policy could lapse and you'll lose coverage. If you want the option to increase your death benefit later in life, a universal life policy could be a top consideration.
• Variable life insurance. Variable life insurance allows you to invest your cash value account in a range of investments like stocks, bonds and mutual funds. The investment feature means you could be exposed to a higher level of risk as your policy's cash value will fluctuate with the market. If the value of your cash account decreases too much, your death benefit could decrease. For those purchasing a policy decades away from retirement who can weather some market storms, a variable life policy could help boost your long-term cash value.

How to know if a LIRP is right for your retirement

If you're curious whether life insurance and retirement could be an ideal match for your future, here are a few scenarios where LIRPs could benefit your existing retirement savings:

• You've already maxed out your IRA and 401(k). If you're a high earner and already contribute the maximum to your personal and workplace retirement plans, a LIRP could create an additional path to tax-free retirement income — especially for those who start saving early when premiums are low.
• You want to secure your loved ones' future. If you have dependents or a spouse who rely on your support, a LIRP could provide a valuable and immediate cash benefit upon your death in addition to your retirement savings.
• You want to build a flexible legacy. With both a cash value and a death benefit, you can use them as needed when the time comes. The death benefit could become part of your estate, or you could use the policy's entire cash value to travel the world. The decision is yours.

Should you buy life insurance after you retire?

If you're already retired, there are still reasons to consider life insurance and retirement. Whether a policy makes sense during retirement will come down to your financial situation and goals.

Adding a life insurance policy to your financial plan during retirement might make sense if:

• You have outstanding debts and want to ensure a loved one has the cash to pay off those balances.
• You continue to work and need to replace that income for a loved one when you die.
• You want to add a tax-free benefit to your legacy for a reasonable cost.

Buying life insurance in retirement might not make sense if:

• You're completely satisfied with your estate plan.
• You don't have any dependents.
• You have little to no debt.

What about taxes and LIRPs?

The tax rules governing LIRPs are fairly straightforward and resemble the rules of Roth IRAs.

You can make tax-free withdrawals up to the amount of your principal contributions — that's the portion of your premium payments that went into your cash value account. Withdrawals beyond your principal contributions are subject to income tax, but you may be able to access your policy's cash value using a loan instead of a withdrawal to avoid taxes.

Looking ahead: What does your retirement look like?

While there's no one-size-fits-all solution to retirement income, LIRPs are another tool to consider as you build a financial plan. With the ability to build cash value outside of a traditional retirement account, they could be a consideration for those of a higher net worth and the ability to fund them adequately. Ultimately, the best retirement income plan will be one that makes the most sense for your finances and goals.

As your life changes, so should your financial, retirement and estate plans. Citizens Wealth Advisors* can help you every step of the way to organize and update your strategies as you work toward your financial goals. Click below to request a call today.

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