Life Insurance Retirement Plan (LIRP)

Life insurance offers much more than just protection to your family in the event of your death. It can be an important financial tool to help protect your family's future. It can also be used to help supplement your retirement income. A Life Insurance Retirement Plan (LIRP) is a strategy using a properly structured cash value life insurance product to help supplement retirement income. Life Insurance offers unique benefits in three tax-advantaged ways:

  1. A death benefit paid to your beneficiaries - generally income tax-free*.
  2. Tax deferral on any increase in policy Accumulated Value.
  3. Access to the policy's Net Cash Surrender Value for supplemental retirement income or other financial needs - generally income-tax free** as long as your policy is properly funded.

This chart below outlines the tax characteristics of several financial vehicles. Life insurance offers a unique combination of tax characteristics. Depending on your financial goals and retirement income needs, one or more of these options may be right for you. The purchase of life insurance requires the individual to have a Death Benefit need and meet the life insurance carrier's underwriting requirements. Financial underwriting and rules governing the treatment of life insurance may limit the amount of premium that can be paid into a life insurance policy. Unlike some other financial vehicles, life insurance has policy charges and may have surrender charges.

* Income Tax treatment includes the treatment of Capital Gains and Dividends. This chart excludes Estate Tax treatment. There are ways to structure your estate to help protect against this impact. Consult with your life insurance producer and independent tax advisor before purchasing any financial products.

** A Certificate of Deposit (CD) is FDIC Insured

*** For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2) (i.e. the "transfer-for-value rule"); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).

For federal income tax purposes, tax-free income assumes, among other things: (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); (2) policy remains in force until death; (3) withdrawals taken during the first 15 policy years do not occur at the time of, or during the two years prior to, any reduction in benefits; and (4) the policy does not become a modified endowment contract. See IRC §§ 72, 7702(f)(7)(B), 7702A. Any policy withdrawals, loans and loan interest will reduce policy values and may reduce benefits.

Individually owned deferred annuities: Upon annuitization, a portion of principal is included in the annuity payout and is not subject to taxes.

Municipal bonds: Generally, interest paid on municipal bonds is tax-free, but not all municipal bonds are exempt from federal and/or state income tax. Some bonds may be subject to capital gains tax at sale. Consult your tax advisor for more information.

Mutual funds: Mutual funds may be subject to income tax and/or capital gains taxation. Consult your tax advisor for more information.

Traditional IRA: If you are covered by a qualified retirement plan at work, traditional IRA contributions are fully deductible only if your adjusted gross income falls within the following limits: single up to $138,000; married filing jointly up to $218,000.

Life Insurance: There is not a specific limit on dollars allocated to purchase life insurance; however, there are maximum premium limits determined by a specified policy face amount. A policy will qualify as life insurance if it meets the requirements of IRC Sec. 7702, which includes limits on the amount of premium that may be paid into a specific face amount and still qualify as life insurance.

Roth IRA: A distribution from a Roth IRA generally is income tax-free if (a) it meets all the requirements for a qualified distribution (which include a 5-year waiting period and one of several additional requirements, one being that the distribution is made to a beneficiary on or after the death of the individual), or (b) it is a nonqualified distribution to the extent of after-tax contributions (basis) see IRC Sec. 408A.