What is a Life Insurance IRA? Understanding the Difference Between IRA and Life Insurance for Retirement Savings

There are numerous approaches one can take to get ready for retirement. Life insurance policies can be used to help save retirement income, even though their main purpose is to assist you financially in the event that you lose a loved one. 1.

In particular, a whole life insurance plan’s cash value feature might be able to supplement your current retirement savings. Fortunately, Aflac provides cash value whole life insurance to assist you in reaching your retirement savings targets. Let’s examine life insurance retirement plans (LIRPs) in more detail, including what they are, how they operate, and who should purchase them.

Choosing the right retirement savings strategy can be overwhelming, especially with the multitude of options available. While traditional IRAs and 401(k) plans are popular choices, some individuals consider using life insurance as a retirement investment. This article delves into the nuances of both IRAs and life insurance, highlighting their key features, tax implications, and suitability for different investor profiles.

Understanding IRAs: A Straightforward Approach to Retirement Savings

IRAs offer a straightforward and tax-advantaged way to accumulate funds for your golden years. You can open an IRA account with a brokerage firm, mutual fund company, or bank and invest in various assets, including stocks, bonds, mutual funds, and even gold bullion.

Key Features of IRAs:

  • Tax-Deferred Growth: Contributions to traditional IRAs are tax-deductible, and the investments grow tax-deferred. This means you only pay taxes on the withdrawals you make in retirement.
  • Tax-Free Withdrawals: With Roth IRAs, you contribute after-tax dollars, but your earnings grow tax-free. As long as you’ve held the account for at least five years and are aged 59½, you can withdraw your contributions and earnings without incurring any additional taxes.
  • Contribution Limits: The annual contribution limit for both traditional and Roth IRAs is $6,500 in 2023, increasing to $7,000 in 2024. Individuals aged 50 and over can contribute an additional $1,000 as a catch-up contribution.

Permanent Life Insurance: A More Complex Retirement Savings Vehicle

Permanent life insurance policies offer a death benefit to your beneficiaries while also incorporating a savings component. A portion of your premium goes towards the death benefit, while another part builds up your cash-value account, which grows on a tax-deferred basis.

Types of Permanent Life Insurance:

  • Whole Life Insurance: With whole life insurance, the carrier credits your cash-value account based on its own investment performance. Expect annual returns in the 3% to 6% range, often earned in tax-free investments.
  • Variable Universal Life Insurance (VUL): VUL policies tie the amount of the credit to the performance of stock and bond funds of your choosing. While the potential returns are higher, so is the risk. If the market experiences a downturn, you may have to pay a higher premium to maintain your coverage.

Accessing Your Cash Value:

  • Paid-Up Additions (PUA): PUA allows you to increase the cash value in your policy at a lower relative cost, maximizing your retirement income.
  • Periodic Withdrawals: You can withdraw from your cash value without incurring tax penalties as long as you don’t exceed your basis (total premiums paid).
  • Surrendering Your Policy: You can surrender your policy and receive the cash value in a lump sum, minus any outstanding loans. However, this will decrease the death benefit for your heirs.

IRA vs. Life Insurance for Retirement: Weighing the Pros and Cons



  • Tax-advantaged growth and withdrawals (depending on the type of IRA).
  • Wide range of investment options.
  • Relatively low fees.
  • No surrender charges.


  • Contribution limits.
  • No death benefit.

Life Insurance:


  • Death benefit for your beneficiaries.
  • Tax-deferred growth of cash value.
  • Potential for higher returns with VUL policies.


  • High upfront costs.
  • Significant surrender charges in the early years.
  • Limited investment options.

Who Should Consider Life Insurance for Retirement?

Life insurance as a retirement investment might be suitable for:

  • Wealthy individuals: They can use irrevocable life insurance trusts to avoid estate taxes.
  • Individuals who have maxed out their IRA and 401(k) contributions: Life insurance can provide additional retirement savings options.

However, it’s crucial to evaluate the high costs associated with life insurance policies and compare them to the potential tax benefits. In most cases, a low-cost term life insurance policy coupled with investments in an IRA might be a more cost-effective and flexible approach.

The choice between an IRA and life insurance for retirement depends on your individual circumstances, risk tolerance, and financial goals. IRAs offer a straightforward and tax-advantaged way to save for retirement, while life insurance provides a death benefit and potential for higher returns but comes with significant costs and limitations. Carefully evaluate both options and consider consulting a financial advisor to determine the best strategy for your specific needs.

Who Should Get a Life Insurance Retirement Plan (LIRP)?

A life insurance retirement plan can be especially helpful in a few specific circumstances. Assuming you are making maximum contributions to your 401(k) or IRA, you might be prepared to begin utilizing a permanent life insurance policy as a retirement plan. 7.

Furthermore, if any family members rely on you for financial support, a LIRP can assist you in planning for retirement and safeguarding your loved ones in the event of an emergency.

Finally, a LIRP can assist you in saving more money outside of the IRS contribution caps if you have significant retirement savings goals. For instance, in 2024, the maximum contribution to an employee-sponsored 401(k) is $23,000, up from $22,500 in 2023, and the annual maximum contribution to an IRA for individuals over 50 is $7,000, up from $6,500 in 2023. Under the SECURE 2 law, the IRA catch-up contribution cap for people 50 and older was modified. Act of 2022 to maintain $1,000 for 2024 but incorporate an annual cost-of-living adjustment 8.

What Is a Life Insurance Retirement Plan (LIRP)?

LIRP, or life insurance retirement plan, is not intended to take the place of a traditional retirement plan such as an IRA or 401(k). 2 A permanent life insurance plan is typically mentioned when someone is thinking about a life insurance retirement plan, or LIRP. The two life insurance terms can be used interchangeably. 3.

Because LIRPs have a cash value component that gradually accrues savings, they are permanent policies. 4 Standard death benefits are also provided by permanent life insurance plans, which never expire and pay out to a beneficiary upon the policyholder’s passing. 5 This indicates that the policyholder’s life insurance retirement plan is guaranteed for the duration of their life.

In essence, a portion of the premiums you pay for a life insurance retirement plan are deposited into a savings account called the cash value. With time, this savings account can increase tax-deferred and at a fixed interest rate. 6 You can use this cash value in a few different ways to use life insurance to pay for retirement benefits.

  • Overfund Cash Value: Your LIRP’s cash value can increase more quickly and provide you with a stronger base to work with in the future if you decide to contribute more to it.
  • Borrow Against Cash Value: You may be able to obtain a loan based on the amount shown in your life insurance retirement plan’s cash value savings account. This could be very useful if you’re trying to make a big purchase in your later years.
  • Withdraw Cash Value: You might be able to take money straight out of the cash value savings account in certain emergency situations. This isn’t always feasible, so we advise you to look more closely at the life insurance retirement plans you are thinking about.

Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.

What Is A Roth IRA? – Life Insurance Exam Prep

Can a life insurance IRA fund your retirement?

You can take advantage of a life insurance retirement plan (LIRP), but any money that you borrow will have to be paid back with interest. If you have a retirement account, you can use that to fund your retirement. That’s not something you can do with a life insurance policy. Roth IRAs are great options for planning your retirement.

Is a Roth IRA the same as life insurance?

No, a Roth IRA isn’t the same as life insurance. A Roth IRA is an individual retirement account that you contribute toward using after-tax dollars. The money in the account goes toward different investments and grows tax-free over time until you reach retirement age.

Does an IRA provide a life insurance payout?

An IRA provides no life insurance payout in the event of the death of the owner. It was intended to be a product that solely helped people save money for retirement while getting a tax break for doing it, and it has remained that way. Payouts are very different for an IRA vs. a life insurance policy.

Should I open an IRA or a life insurance policy?

If you’re trying to decide between opening an IRA (Roth or traditional) or opening a life insurance policy for the purpose of retirement savings, IRAs are almost always a better choice. A Roth IRA offers higher returns on your contributions than what you would get from a life insurance cash value account.

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