What Is a Life Income Plan?

A life income plan is a financial product for high-income professionals that ensures a lifetime guaranteed income for retired participants. Similar to a charitable remainder trust, life income plans are funded by a pool of investments.

Understanding the Life Income Plan

Participants in a life income plan transfer assets into a managed pool of funds. The pool of funds pays out to retired contributors in the form of a lifetime guaranteed income.

In many ways, life income plans are similar to charitable remainder trusts. That is, they provide periodic income dispersals to beneficiaries for a specified period, after which the remainder of the fund is donated to a designated beneficiary, usually a charity.

A key difference between life income plans and charitable remainder trusts is that life income plans are funded from pooled income. Pooled income funds are usually invested in a portfolio of fixed-income securities, and the fund managers are responsible for preserving or increasing the principal.

A Philanthropic Strategy

Many life income plans are rooted in a philanthropic strategy, in which a charity manages the pool of funds. In such cases, the charity assumes control and ownership of the assets upon the death of the donor, or upon the death of the last-named beneficiary.

Life income plans are most appropriate for high-income professionals and business owners seeking strategies to ensure income replacement and continued financial independence during retirement. In many cases, life income plans also provide an element of life insurance protection as well.

The Price of Entry

While the price of entry into a life income plan can vary from plan to plan and country to country, a common scenario described in life income plan prospectuses illustrates a $100,000 initial investment. Nevertheless, some more affordable plans specify a minimum investment as small as $5,000.

Under most life income plans, the managing organization establishes an annual payment agreement with participants, ensuring minimum income payments at regular intervals. Additional payments, such as a death benefit, may be included.

The Pension Gap

Life income plans are among the financial products that have emerged in recent years as a dwindling number of American workers are covered by any kind of private-sector pension plan.

As the U.S. private sector began to shift away from defined-benefit pensions in favor of 401(k) plans and individual investors began to move retirement funds into IRAs, many analysts have anticipated a looming retirement crisis.

As late as 1975, the Center for Retirement Research showed that 98% of public-sector workers and 88% of private-sector workers were covered under defined-benefit plans. By 2018, these figures had dropped precipitously. Although 77% of public workers were still covered, only 13% of private-sector employees had pensions.

And for many, there was no replacement. A 2020 study by the Schwartz Center for Economic Policy Analysis at the New School found that only 36.2% of working-age people participated in an employer-sponsored retirement plan.

As these trends continue, analysts continue to speculate on solutions, while workers are encouraged to invest in independent retirement plans which fit their budgets and needs.