Using Life Insurance as a Retirement Plan (LIRP)

Traditionally with life insurance, the focus has been on the death benefits that are provided to families at the passing of our loved ones.  Generally, not enough attention has been paid to the living benefits of a life insurance policy, e.g., the potential for tax-free retirement income, accelerated benefits to cover the expenses of chronic or terminal illnesses and also as a vehicle to cover college expenses.  Approximately 85% of Fortune 500 CEO’s use a Universal Life Insurance policy or Life Insurance Retirement Plans (LIRPs) to accumulate a stream of tax-free cash-flow in retirement. 

 As we examine the potential of creating a tax-free stream of income at retirement using a LIRP, let’s first look at current available economic indicators. The current US National Debt is approximately $22 trillion and rapidly growing. Allocated per citizen, that is $68,371 each.  As not all citizens pay taxes, the US National Debt represents $183,023 per US taxpayer (Source   This is mainly due to an aging population, rising health care costs, an expansion of federal subsidies for health insurance and growing interest payments on the federal debt.

When one searches for financial advice, whether on the internet, radio or publications, they are likely to come across this popular traditional advice: ‘Start an IRA and defer taxes whenever possible’. This may have been true in the 1980’s when defined contribution 401(k) plans started to rise in popularity; In 1980 the top marginal federal tax rate was 70%. For the top income earners, they were essentially taxed 70% federally on their top dollar earned. Currently, the top marginal federal income tax rate is 37.00%.  At that time, it made sense for employees to choose to defer taxes for their top dollar earned at 70% and 39 years later (today) take a withdrawal from their 401(k) balance at a 37.00% tax rate.

The question for today’s workers is does this advice still hold true?  To answer that, one must first ask the following question: are tax rates likely to be the same, lower, or higher in the future?  Current tax rates are scheduled to sunset on January 1, 2026, thereby reverting to the pre-2018 individual tax rates, where the top marginal tax rate will increase from the current 37% and revert to 39.6%.  Between now and 2026, you would technically be deferring taxes at a 37% rate in order to pay at a 39.6% tax rate beginning in 2026.  We are currently in a historically low tax rate environment that offers an opportunity to insulate your retirement accumulations from future increases in our tax rates.  This is valuable information that has the potential to extend the life of your retirement assets.  Please check with your tax advisor.