‘LIRPs’ Can Help Fund Business Succession

Key Takeaways:
  • The clearest way to think of LIRP is as a non-qualified or non-401(k) investment that a person can take out personally, or on a family member or even a key manager in their business.
  • Life insurance retirement plans are most effective for higher earners making at least $200,000 a year, and for business owners.
  • A saver should be maxing out their traditional retirement plans and still have at least 5% of their income available for further retirement savings.


When the subject is life insurance, most people think of a financial safety net for a family in the event that a parent or primary provider dies. But life insurance can also be a key element in a retirement plan, particularly for higher earners who are already maxing out their 401(k) contributions but still have cash they can put toward retirement.

The clearest way to think of a Life Insurance Retirement Plan (LIRP) is as a non-qualified or non-401(k) investment that a person can take out personally, or on a family member or even a key manager in their business.

Most major life insurance companies will structure such a policy, and the policies are flexible enough that there is a range of how to fund the premiums each year.

Essentially, what you are doing when you purchase a LIRP is building equity inside a cash value policy that also has a death benefit and acts as a super-ROTH IRA. Life insurance is not a deductible expense, so the premium payments are made with after-tax money. But there is no limit on contributions going in (subject to TEFRA and TAMRA guidelines), and if the withdrawals that are made 20 or 30 years later are structured carefully, they may also be tax-free.

In fact, the only other limitation on a LIRP may be your insurability. You must be able to qualify for life coverage with the company issuing the policy. Since most people are in their 40s or early 50s when they buy LIRP policies, qualifying for coverage is typically not an issue.

Should the owner of a LIRP die prematurely, their survivors would receive both a death benefit and the amount of the growth that has occurred in the policy if established with an increasing death benefit.

Types of Policies

Distinct types of policies are available that address purchasers’ varying levels of risk tolerance. For example, a variable universal life policy allows the holder to direct investments into separate accounts offered by the insurance company. The policies come with potentially higher returns, but also greater volatility, and there may be limited downside protection. On the other hand, through an indexed universal life policy, you can direct investments into more predictable, less volatile index funds. These policies may have lower returns, but there is downside protection since your invested funds are guaranteed against losses.

Advantages of a LIRP

The advantages of a LIRP include:

  • Tax-deferred Growth: A primary benefit of using life insurance for retirement planning is the tax-deferred growth of the cash value component. Permanent life insurance policies, such as whole life, universal life, and variable life, accumulate cash value over time. This cash value is not subject to income tax if the policy remains in force.

This allows the policyholder’s investment to compound over the years without the drag of taxes, potentially leading to significant accumulation of wealth by the time retirement arrives.

  • Tax-free Withdrawals & Loans: Another significant advantage is the ability to access the cash value through tax-free withdrawals and loans. A saver who has been paying into a policy for 10 years may suddenly have a significant need for cash. They could borrow against the cash value of the policy with no tax consequences and repay the loan over time as they are able. When borrowing, it is important to work with a knowledgeable advisor, since the policy could lapse if you withdrew too much.
  • Protection & Security: Life insurance provides a dual benefit of protection and security. In addition to the cash value accumulation, the policyholder is covered by the death benefit. This ensures that in the event of their death, their beneficiaries will receive a financial payout. The death benefit can also be used to pay off debts, cover final expenses or provide a legacy.
  • Guaranteed Returns: Certain types of permanent life insurance policies, such as whole life insurance, offer guaranteed returns on the cash value. This guarantee provides a certainty not typically found in other investment vehicles, such as stocks or mutual funds. You may pay more for such guarantees, but for individuals who are risk-averse or looking for stable, predictable growth, these guarantees can be attractive.
  • Flexible Premium Payments: Many permanent life insurance policies offer flexible premium payment options. This allows policyholders to adjust premium payments based on their financial situation. During times of financial difficulty, policyholders might be able to reduce their payments, or even use the accumulated cash value to cover the premiums. This flexibility can be crucial for maintaining the policy without financial strain.
  • Rider Benefits: Life insurance policies can be customized with various riders that enhance their utility for retirement planning. For example, a long-term care rider can provide benefits if the policyholder requires long-term care services. Similarly, a critical illness rider can offer financial support if the policyholder is diagnosed with a serious illness. Other riders will guarantee your premiums should you become disabled. These riders can provide additional layers of security and financial support during retirement.
  • Attractive for Early Retirees: For business owners and others who may envision early retirement, a LIRP can help fund retirement in the years before withdrawals from traditional retirement plans and Social Security benefits kick in.
  • Key Part of Succession Planning: Business owners often set up LIRPs for key employees as a benefit, but they can also play a role in succession planning. If an owner is looking 10 or 20 years out at exit and knows a group of key employees would like to buy the company, funding LIRPs for them can help them raise the capital to assist with the buyout.
  • Recover your Premiums First: Under accounting and tax rules, life insurance is a “First In, First Out” (FIFO) investment. That means when you start taking money out, the withdrawals you make up to the amount of your premium payments are tax-free. You only have a tax liability on withdrawals when you get to the growth portion of the cash value.
    • For example, if you have paid $20,000 a year for 20 years, your premium basis is $400,000. So, the first $400,000 you withdraw is tax-free. Hence, if you keep your withdrawals low for as long as possible, then “borrow” against the cash value to fund further withdrawals, you could avoid taxes altogether. When you die, the loans would be paid off by the death benefit, and any remaining death benefit would be distributed tax-free to your beneficiaries.
  • Estate Planning: Life insurance can play a strategic role in estate planning. The death benefit from a life insurance policy is income tax-free to the beneficiaries and can be used to pay estate taxes, ensuring that the policyholder’s estate is preserved for their heirs. This can be important for individuals with significant assets who are concerned about the impact of estate taxes.
  • Diversification: Incorporating life insurance into a retirement plan adds an element of diversification. While traditional retirement accounts are often invested in the stock market, bonds or real estate, life insurance cash values are managed by the insurance company and can vary depending upon what the policyowner chooses. There are several different types of assets with their own risk and return characteristics.

This diversification may help mitigate overall portfolio risk and provide more stability in retirement.

Who Benefits from LIRPs?

Life insurance retirement plans are most effective for higher earners making at least $200,000 a year, and for business owners. Generally, a saver should be maxing out their traditional retirement plans and still have at least 5% of their income available for further retirement savings.

You can learn more about how a LIRP would work for you by contacting an Adams Brown Wealth Consultants advisor.