How to Use Life Insurance for Retirement

Rebecca Parson
Rebecca Parson

Rebecca Parson


Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at,,,,, and more.

Brian OConnel
Brian OConnel

Brian O'Connel


Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC,, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

Using Life Insurance to Fund Retirement 

Life insurance can be a smart tool for retirement planning. But it’s not always the best choice for everyone.

For people with a net worth over tens of millions of dollars, using cash-value life insurance makes sense because that’s when federal estate taxes kick in. It can also make sense if you’re already annually maxing out contributions to 401(k)s and other tax-advanted accounts.

For many people, there’s a better way to use life insurance for retirement: buying term life insurance, then taking any extra money and putting it in tax-advantaged retirement accounts.

This strategy works well for a few reasons. Term life insurance is cheaper than permanent policies. It gives you the protection you need without the high costs. Plus, investing in retirement accounts often gives you better returns in the long run.

Cash value life insurance can still play a role in some retirement income strategies. But it’s usually not the main focus — instead, think of it as one piece of a larger plan.

Remember, everyone’s situation is different. It’s always a good idea to talk to a financial advisor about your specific needs. They can help you create the best retirement plan for you.

Key Takeaways

  • Using life insurance for retirement involves getting a life insurance policy with cash value, like whole life, universal life, or variable life insurance.
  • A life insurance retirement plan (LIRP) is a good option if you’ve maxed out your 401(k) and ROTH IRAs, or if your net worth is over tens of millions of dollars.
  • Term life insurance is cheaper and can be a source of retirement income for the surviving spouse/
  • Life settlements can provide immediate funds by selling your policy for a lump sum payment.

How to Use Term Life Insurance in Retirement Planning

Term life insurance can help provide retirement income for a surviving spouse. The working spouse needs enough death benefit coverage to cover significant debts, future expenses like college, and ongoing family living costs. 

The Basics of Term Life Insurance

Term life insurance offers the most affordable life insurance coverage by ensuring a death benefit for a specific period, such as 10, 20, or 30 years. Unlike whole life insurance, it doesn’t have a cash value component. When the term policy expires, you can renew it, convert it to permanent coverage, or let it lapse.

Whole life insurance typically costs at least ten times more than term life. Therefore, term life insurance can be an effective retirement planning tool in two ways:

  1. It provides essential financial protection if a breadwinner dies before accumulating sufficient savings for the family’s needs. 
  2. The lower premiums leave more room in your current budget to save for retirement in tax-deferred growth accounts.

Because of its lower premium payments, term life insurance helps maintain a balanced retirement budget, offering protection without straining your finances. 

How to Use Life Insurance Retirement Plans (LIRPs) in Retirement Planning

No cap on contributionsGenerally more expensive than other investments
Ability to take loansContributions are not tax-deductible
Option for tax-free withdrawalsExceeding cash limits can negate tax benefits

What Is a LIRP?

A life insurance retirement plan (LIRP) is a permanent life insurance policy that accumulates cash value, which can be utilized as supplemental retirement income. Although it has “plan” in the name, a LIRP isn’t a type of life insurance plan per se. Rather, it’s a financial strategy using life insurance plans. As you pay premiums, a portion is allocated to a savings account, known as the cash value, which accumulates tax-deferred interest.

Types of LIRPs include:

  • Whole Life Insurance: This is the most common type of permanent life insurance, offering a fixed death benefit and a cash value that grows at a guaranteed interest rate.
  • Universal Life Insurance: Universal life insurance provides flexible interest rates, potentially leading to greater cash value growth in bull markets and slower growth in bear markets.
  • Variable Life Insurance: Variable life insurance allows policyholders to choose their own investments, making it the riskiest option. The cash value is not guaranteed and you could lose money if the investments don’t do well.

How LIRPs Work

LIRPs work by putting any amount you pay over the premium amount into the cash value, which grows over time at a fixed or variable interest rate, depending on the plan you choose.

Here are a few ways you can use cash value for retirement benefits:

  • Overfunding Cash Value: Contributing more than the required premiums accelerates the cash value’s growth.
  • Borrowing from Cash Value: You can borrow against the cash value of your LIRP without paying taxes or a penalty on the loan. However, the insurance company will charge you interest on the loan.
  • Withdrawing Cash Value: In emergencies, you might withdraw directly from the cash value. However, whether you can depends on your specific policy terms.

Additional Considerations for LIRPs

LIRPs offer unique advantages in retirement planning, including flexibility and tax benefits. However, they should not replace traditional retirement accounts like Roth IRAs and 401(k)s. 

You should also understand the IRS limitations on cash contributions to avoid your policy being classified as a modified endowment contract (MEC), which can negate the tax advantages of your LIRP.

Additionally, LIRPs aren’t a replacement for having savings like an emergency fund, and their financial benefits don’t bear fruit for years. This is because it takes years for cash value to begin to accrue — and it can take decades for cash value to grow to a significant sum.

Integrating a LIRP into your retirement strategy helps create a comprehensive plan that includes life insurance, supplemental retirement income, and estate planning — all to create financial security for you and your beneficiaries.

How to Use Life Insurance to Generate Income

Another way to generate income from your life insurance policy is through a life settlement. A life settlement involves selling your life insurance policy to a third-party investor for a lump sum payment that is typically higher than the cash surrender value but less than the death benefit. 

A life settlement provides immediate funds, which can be particularly useful for retirees needing supplemental income or for those facing unexpected expenses. By selling your policy, you transfer the responsibility of paying premiums to the buyer, while you enjoy the financial benefits now. The primary downside is that your beneficiaries won’t receive your death benefit.

FAQs About Using Life Insurance for Retirement

Can a Life Insurance Policy Be Used for Retirement?

Yes, a lfe insurance policy can be used for retirement. To do so, you buy a life insurance policy that offers cash value. As you build up cash value, you can withdraw from or borrow against it.

How Do Life Insurance Retirement Plans Work?

Life insurance retirement plans work by letting you build cash value in a life insurance policy. As you contribute and as the cash value accrues tax-deferred interest, you can borrow or withdraw from it.

Is It Better to Have Life Insurance or a 401(k)?

It’s usually better to fully fund a 401(k) and ROTH IRA before turning to life insurance as a retirement savings strategy. This is because LIRPs have more fees and are more expensive due to including the cost of life insurance coverage.

What Happens to Life Insurance When You Retire?

Life insurance doesn’t end or change when you retire unless you have employer-provided group life insurance, which usually ends upon retirement.

Sell your life insurance policy for cash.

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