What Is a LIRP (Life Insurance Retirement Plan)? How It Works

A LIRP works by overfunding a permanent life insurance policy beyond the cost of the death benefit, building cash value that grows tax-deferred inside the contract. The policyholder pays premiums—often structured to maximize cash accumulation while staying under IRS guidelines (Modified Endowment Contract rules)—and the insurer credits interest or equity-indexed gains to the cash account.

The death benefit pays off the outstanding loan balance, with any remainder going to beneficiaries income-tax-free. If the policy lapses or is surrendered with a loan outstanding, the borrowed amount becomes taxable income to the extent it exceeds the cost basis (total premiums paid minus prior withdrawals).

Variable universal life (VUL) allows investment in subaccounts similar to mutual funds but carries market risk with no downside floor, making it less popular for conservative LIRP designs. Term life insurance has no cash value and cannot serve as a LIRP.

A life insurance retirement plan has no annual contribution cap dictated by the IRS—owners can fund policies with tens or hundreds of thousands of dollars per year, subject only to underwriting and the Modified Endowment Contract (MEC) seven-pay test. Traditional and Roth IRAs cap contributions at $7,000 in 2024 ($8,000 age 50+), and 401(k) plans cap elective deferrals at $23,000 ($30,500 age 50+).

Cash value growth inside a permanent life insurance policy is tax-deferred—no annual 1099 and no capital gains tax on equity-indexed credits. Policy loans are not taxable events under IRC Section 7702, so a retiree can borrow $50,000 per year and pay zero federal or state income tax, as long as the policy stays in force.

Death benefit proceeds pass to beneficiaries income-tax-free under IRC Section 101(a), paying off any outstanding loan balance first. However, if the policy lapses or is surrendered with a loan, the loan becomes taxable phantom income.

Key risks include policy lapse if premiums are underfunded or loans exceed cash value, triggering a taxable event and loss of coverage. Illustrated returns in sales materials often assume sustained high crediting rates (6–8% for IUL) that may not materialize; actual returns in flat or volatile markets can be significantly lower.

A LIRP makes most sense for individuals who have maxed out 401(k), 403(b), and IRA contributions, face high marginal tax rates now and in retirement, want supplemental income that does not increase Medicare Part B and D premiums or subject Social Security benefits to taxation, and plan to hold the policy for 15+ years. Business owners sometimes use LIRPs for key-person insurance or nonqualified deferred compensation, capturing dual benefits of coverage and cash accumulation.

How much can you contribute to a LIRP each year?

There is no IRS annual contribution limit for a life insurance retirement plan, but the Modified Endowment Contract seven-pay test restricts how quickly premiums can be paid in the first seven years without losing tax-free loan treatment. High-net-worth individuals can fund policies with six or seven figures annually, subject to underwriting approval and insurer guidelines.

Can you lose money in a life insurance retirement plan?

Yes. If the policy lapses due to underfunding or excessive loans, you owe income tax on gains and lose coverage.

How do policy loans work in a LIRP?

What is the Modified Endowment Contract rule?

A Modified Endowment Contract (MEC) is a life insurance policy that fails the IRS seven-pay test—meaning premiums in the first seven years exceed a corridor tied to the death benefit. MEC policies lose the tax-free loan benefit; all distributions are taxed as income first (last-in, first-out) and may incur a 10% penalty if taken before age 59½, similar to IRA early withdrawals.

How does a LIRP compare to a Roth IRA for retirement income?

A Roth IRA offers tax-free qualified distributions after age 59½ and a five-year holding period, with no ongoing insurance costs and contribution limits of $7,000 in 2024 ($8,000 age 50+). A life insurance retirement plan has no contribution cap, no RMDs, and tax-free policy loans at any age, but carries insurance expenses and requires sustained funding to avoid lapse.

At what age should you start a life insurance retirement plan?