Much like a game of chess, retirement planning is about strategy. Back in the 1970s the traditional route was relying on Social Security and having a pension. Today retirement is entirely on the individual to fund—and Social Security only should be about 40% of what you need. And among the various products out there, a life insurance retirement plan (LIRP) can help supplement your income during retirement.

So, what exactly is a LIRP?
A life insurance retirement plan is a permanent life insurance policy that uses its cash value to fund retirement. While mimicking tax benefits of Roth IRAs, any life insurance that is permanent with cash value (i.e. whole life insurance) can be used. However, term life insurance cannot be used as a life insurance retirement plan since it does not have a cash value.

How is the cash value used?
Based on your individual policy, a set percentage of the life insurance policy’s premium payment is put into a tax-deferred savings like an investment account. This becomes known as the cash value of the policy. Over time, the cash value account grows.

Once the account has accumulated a certain amount or has grown long enough, you can access the money by either withdrawing or taking out a loan against it. This money can then be used to provide tax-free income during retirement.

How can you use your LIRP in retirement?
LIRPs are great for supplementing your existing retirement funds. Assuming you max out contributions to traditional retirement accounts, you can put the extra funds into your cash value, creating additional growth. Furthermore, in case of a stock market downturn, having the cash value to pull from is great.

To build your cash value fund pay more than your required premium. Some policyholders chose to overfund their cash value account. Any extra amount paid goes directly into your cash value account and grows tax deferred. However, this strategy only works if you do not make withdrawals before age 59 ½. A cash value policy, if overfunded, can exceed the annual premium limit set by the IRS. Should this happen, it may convert to a modified endowment contract (MEC)—meaning your policy is subject to additional taxes and penalties.

The cash value of your policy can be supplemental income. The beauty of a cash value policy is your capability to withdraw from it. In additional to your traditional retirement accounts and Social Security, your LIRP can be used as supplemental income. This allows for increased retirement spending, should you wish such as a small road trip or to offset if the market has a downturn.

​Your policy can be used for long-term care. With a long-term care rider, you may have the option to use the cash value portion of your LIRP to have long-term care covered should you need it. The rider provides coverage from the cash value account if you need to pay for a nursing home, assisted living, or even medical expenses associated with long-term care as you age. A LIRP might not be for everyone, but it could supplement your retirement income, help cover medical expenses, or help take care of a long-term care