Preserve Wealth with Life Insurance Retirement Plan (LIRP)

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Most people think of life insurance as a financial safety net for their heirs by establishing a death benefit to replace lost income. However, for individuals with substantial assets, life insurance can serve a distinct purpose as a powerful financial planning tool and a tax-efficient strategy for growing and preserving wealth. This is especially true when considering how life insurance for retirement may change.

"Typical life insurance is about trying to get the lowest premium for the highest death benefit," says Sarah Williams, vice president and senior insurance specialist at Fifth Third Private Bank. "With a LIRP, we do the opposite and look for the lowest death benefit because that’s where the cost is, while overfunding the policy to build up the account value."

What is a life insurance retirement plan?

A life insurance retirement plan (LIRP) is a permanent life insurance policy designed to provide both lifelong coverage and a tax-advantaged way to build supplemental retirement income. LIRP insurance premiums are paid with after-tax dollars, grow tax deferred and can be accessed tax-free in retirement. Unlike traditional retirement investments, there are no contribution limits or age restrictions.

"When structured properly, you can put as much as you want into a LIRP," says Williams, who adds that premium payments are typically set to be made annually over 10 years. There are no income thresholds or penalties for taking money out early, which makes LIRPs very attractive for high-net-worth individuals already maxing out their contributions to 401(k)s and IRAs. This flexibility means LIRPs can serve a wide range of purposes, depending on your needs and goals.

Bridging the early retirement gap with a LIRP

For high earners planning to retire early, a LIRP can provide access to income until savings in retirement accounts can be drawn down without incurring penalties.

For example, if a 35-year-old executive who is already maxing out their 401(k) savings wants to retire at age 50, they can set up a LIRP that will function as a bridge during that gap. "Since there are no age restrictions on taking income from the life insurance policy, they can turn on income from the policy at 50 and then transition to drawing from their 401(k) or other retirement accounts at age 59 1/2," explains Williams. (See Fifth Third Private Bank’s insurance guide for high-net-worth individuals here.)

Protect your portfolio from market losses with a zero-floor LIRP

In volatile markets, LIRPs can serve as a safety valve, providing cash flow to avoid the forced sale of investments at a loss during a market slump. "When an investment is taking a beating, the last thing people want to do is pull money out and lock in a double loss," says Williams.

Instead, investors can give their portfolios time to ride out down market values by drawing income from their life insurance policy. Some people choose a steady income stream, while others prefer to change the amount every year depending on market conditions. Investors prioritizing market protection can look to zero-floor LIRPs, such as indexed universal life policies, which provide downside protection while still capturing upside potential—making them a good complement to traditional investments. The cash value of these policies is tied to a market index such as the S&P 500, and if the index posts a negative return, the zero floor means you never lose principle due to market performance.

Use LIRPs to manage tax brackets in retirement

Withdrawals from traditional retirement plans typically count toward taxable income, meaning that large distributions may push an investor into a higher income tax bracket. A LIRP can help investors avoid this situation by taking a lower distribution from their retirement account and supplementing their income with tax-free LIRP distributions or a loan against the policy’s cash value.

For example, assume a 30-year-old nonsmoking male sets up a LIRP and funds it with $50,000 a year for 10 years. By age 65, the policy’s cash value, which continues to compound tax deferred, would be approximately $2.5 million, assuming a 5% annual average return, according to a detailed estimate provided by Allianz Life Insurance of North America. This could give the retiree access to as much as $220,464 a year in tax-free retirement income, enabling him to manage his tax bracket carefully, taking only what he needs from his taxable investment accounts and relying on his LIRP for the remainder.

LIRPs for tax-efficient generational wealth transfer

For individuals looking for a tax-efficient way to cover future expenses for children, grandchildren or heirs, putting funds into a LIRP may offer a more flexible alternative to other gifting strategies. Rather than write a check that falls within the annual gift tax exclusion of $19,000 for 2025, placing those funds in a LIRP will allow them to compound tax deferred, creating a pool of tax-free income that is not restricted to education and can be used in multiple ways, says Williams. "Unlike a 529 plan, which must be used to pay for education to be withdrawn tax-free, the kids can use it to make a down payment on a home, start a business, fund their future retirement or whatever they need."

How employers use LIRPs to retain top talent

When used as a tool to reward and retain top talent, LIRPs can offer more flexibility than traditional retirement accounts and other types of incentive pay. "Business owners like that they’re not restricted by contribution caps and age restrictions," says Williams. "They also are not bound to offer everyone a plan or the same amount, so there’s a lot more flexibility." Commonly referred to as golden handcuffs, employer-owned LIRPs typically have a vesting schedule tied to the deferred compensation, creating a strong incentive to stay.

As with any complex financial tool, LIRPs are not a one-size-fits-all solution and must be structured carefully to retain their favorable tax treatment. Consulting with your Fifth Third Private Bank advisor can help you determine whether a LIRP is suitable for your circumstances, goals and stage of life and, if so, how best to integrate it into your overall financial plan.

"Ultimately, the value of a LIRP depends on how well it aligns with an individual’s goals and financial situation," says Williams. "Set up thoughtfully, it’s a powerful complement to traditional retirement and investment plans that opens up opportunities, which are not available with other strategies."

For more information about LIRPs, contact your Fifth Third Private Bank advisor.