Retirement Insurance Coverage: An Expert Guide (2023)

You’ve always known this moment was coming, but that never made it feel real, did it? You’ve always heard about getting older, and somehow, it still creeps up on you. Maybe you never got the chance to plan as you’d hoped, or maybe you did, but you’re looking to reinforce the financial ramparts.

Either way, life insurance retirement plans (LIRPs) are almost certainly right for you. With an array of benefits on the table, it’s worth digging in, doing your research, and gathering quotes to find the right LIRP for you.

Life Insurance Retirement Plans Explained

When it comes to retirement, you can never be too secure. At first thought, we often imagine life insurance as a policy that pays out in the event of an insured’s passing, and that is true. However, that’s only one thing a life insurance policy can do.

The practice of life insurance, in particular, predates the formation of our country by 70 years, so our laws tend to be friendly toward this historical practice. In the three centuries since its conception, life insurance has expanded in several directions and now offers a slew of options and benefits.

Life insurance is about more than a death benefit, or at least it can be. Whole life policies are long-term standing agreements, and as such, they build equity over time. Speaking with those new to this idea, equity can be confusing. Let’s try to explain.

Agreements hold financial value and can be treated as a commodity. For example, when you sign a mortgage, your word to pledge money over an extended period of time (usually 30 years) is immediately bestowed with value. The bank takes your word to the bank, so to speak.

That’s why your mortgage lender can turn around and sell your mortgage, but it’s also why you can take out a second mortgage on top of the one you have. Written agreements hold literal value.

Whole life insurance works the same way. It’s an agreement of funds over an extended period of time, so it has value. Specifically, it accrues cash value which can become your money.

How does a life insurance retirement plan work?

To take advantage of a life insurance retirement plan, you have to set up your LIRP account properly. To gain cash value, the fast way is similar to how you pay off a mortgage quickly — you overpay. If you’re beginning your retirement planning through this method early, then this shouldn’t be a problem.

The hack — should we call it that — is to request a high enough payout to give you the highest chance of long-term equity. To do this, you’ll want to select a plan with a low enough premium that you can regularly overpay but a high enough premium so that cash value can build into a nest egg.

The benefit here is that while death benefits have tax implications, taking a loan out against the equity you’ve built won’t. There’s nothing more stressful than hitting an emergency situation and staring at your Roth or 401k, wondering if the emergency is worth a penalty. This provides an “out.”

LIRP insurance is also a fiscally sound manner of transferring wealth. Should you live long enough and pay enough to chip in more than the initial payout amount, they’ll just raise the death benefit to accommodate what you’ve done.

So, what’s the catch about life insurance retirement plans?

It’s the question most often received when talking about insurance retirement plans. “If there are only upsides, then how does the insurance company still win?” It’s a great question and worth exploring.

If you’re late to the game, entering this arena can be a challenge. The older you are, the higher life insurance premiums begin by default for any given payout amount. The higher your premiums, the more you’ll have to shell out in order to overpay.

That doesn’t rule you out, but it means you should proceed with caution. It’s great to plan eagerly, but you should never agree to a premium amount without being positively certain that you can afford it, even during the worst month or year you can anticipate. The “catch” is if you lose the policy, it’s gone.

Should I fund my retirement with a LIRP?

Life insurance retirement plans aren’t an investment. There’s no stock market ticker on the other end of your premium. For that reason, you might expect to see tremendous cash value increases in a year in which your chosen insurer has performed well, or you’ll see exactly what you’ve put in and not a dime more.

The greatest benefit of hoarding capital in this particular manner is that your funds won’t diminish with any market crash. We like to imagine 2008 as an oddity, but global stock market crashes happen at a regular pace of nearly once per decade.

Life insurance is a conservative option. It offers a generous death benefit to your beneficiaries, the chance of building secure cash value, the ability to take out a loan at a reasonable interest rate in the event of an emergency, and the option to fully cash it out if chaos ensues. Find out how bad it is to not have life insurance.

Beyond that, should the worst happen and you find yourself terminally ill, most providers allow the final death benefit to be disbursed sooner to provide even more aid in life’s most difficult moments. Through all this, it’s among the most reasonable of plans to have.

It won’t pay out head-spinning figures, nor will it let you down as though you’d dropped your life savings into Sears stock. It merely provides a steady, stable, future-proof option. And really, what more could you ask for?

Which are the best retirement insurance companies?

In essence, choosing a life insurance company is like gambling on a horse. You want to select the steed you expect to win the race. How your cash value builds is determined in large part by the size and reputability of the provider.

Finding the right plan is about locating the proper intersection between premiums and reputation. State Farm may very well be the most conservative bet — they’re the largest provider on the market and a multi-billion dollar company. There’s a low chance they won’t see regular gains. Learn more in our State Farm Insurance Review.

On the other hand, smaller companies can offer preferential rates because they’re trying to grow, so they appreciate each new member more. Having a smaller money pool, they may grow like wildfire or suffer insurmountable losses. It’s a risk built into the price.

LIRP vs 401k & IRA

Were you a farmer with a plot of land, you might not ask yourself whether to plant apple trees or pear trees. Why not plant both?

401k and IRA programs were developed by government entities, and financial advantages are built in. IRAs are preferable for their tax benefits, and 401ks for their employer matching. The extent of their benefits is often defined by the income of the individual in question.

Both of these programs are investments and can sway with the market. These plans can rely on extensive expertise, either on your part or of those you elect to handle your money. Still, the money in these accounts belongs to you, rain or shine.

Life insurance plans are a bit different. Because of varying payout levels, if you begin soon enough, you can afford a cash value policy at any income level and allow it to build accordingly. However, because these plans are through private firms, they’re not guaranteed. If you don’t pay them, you can lose them. Learn more in our Securian 401k guide.

In Conclusion: Retirement Insurance Coverage

401ks and IRAs rely on the stock market, whereas whole-life policies rely on your ability to continue payments — and preferably overpayments. Retirement planning is tricky. The sooner you can build your future, the better.

If you can avoid it, don’t forsake one method for another. Gather quotes, do your research, and chart the path that’s most beneficial for you and yours. Rather than apples or pears, plant both if you can.