Are you looking for a retirement plan or a new investment? First, you need to understand that a 7702 plan doesn’t really fall under this category. A tax-advantaged policy for life insurance is the 7702. Although some types of life insurance can be used to invest or retire, the primary purpose of life insurance should be to protect your loved ones against financial hardship.
Insurance companies use the name 7702 as a marketing tool to sell life insurance. If you see an insurance policy sold under this name it will likely be a specific type of plan, such as a whole-life policy or a universal policy.
It is crucial to understand which type of life insurance you are purchasing. Each policy type has a different way of handling the premiums that you pay. Life insurance policies do not have pre-taxed funds, unlike 401 (k) and 403 (b) plans. If you are looking for retirement savings plans, a plan like a 401(k), is probably the best place to start.
What is Section 7702?
Section 7702 of Internal Revenue Code outlines the criteria that cash value insurance policies must satisfy to maintain their tax-advantaged status. This section describes the requirements for premium payments and outlines the cash value accumulation and corridor tests to ensure that a permanent policy’s cash value can grow tax-deferred. Any cash value life insurance policy issued after 1985 is subject to the section 7702 rules. Therefore, section 7702 is a code and not a plan.
The term “7702 Plans” does not mean qualified plans. Any cash value life insurance policy that you purchase is subject to the same tax rules.
Why is Section 772 important?
Section 7702 is important because it determines what types of cash-value life insurance policies can be eligible for tax-advantaged treatment. The Internal Revenue Code section 7702 states that life insurance policies must meet certain criteria. If they do not, both the cash value growth and death benefits will count as income for the beneficiary. This is not a problem for most life insurance policyholders.
Section 7702 of the Internal Revenue Code was established to address the many life insurance policyholders who used cash value life insurance as tax shelters. The IRS tried to stop policies issued before 1985 from offering huge growth potential in the cash value component. To maintain their tax-advantaged status, the cash value of life insurance policies has had to be maintained since 1985.
What is Section 7702?
As we have already mentioned, Section 7702 “plans” are not plans. These are standalone, private-issued cash value life insurance policies. They may have been called this by some insurance agents to mislead clients into believing they were enrolling in a qualified plan. Section 7702 plans are not qualified and have no relationship to real qualified plans like 401(k). Important distinction is that Section 7702 plans can be funded with after-tax money, while 401(k), plans allow pretax contributions (unless it’s a Roth plan). The cost of premiums paid by 7702 plans cannot be deducted because they are considered personal expenses and not retirement plan contributions. These policies have cash value that grows tax-deferred. Policyholders can also take out tax-free policy loan from them. This is true for all cash value policies, regardless of whether they are called a 7702 or not.
The 7702 plan may be a whole-life policy, a universal policy, or a variable policy. The type of policy and the amount paid in premium will determine how much cash value accumulates. Variable policies can have higher long-term growth, but they may also lose value if the market drops. Indexed universal policies are safer as the policyholder’s cash value will not decrease if the underlying financial benchmark index to which the policy is linked does not perform well. They do not offer the same growth potential as variable policies, however. These policies and plans have a death benefit that is tax-free, regardless of the type of policy.
What is the difference between a 7702 and a retirement plan?
A cash-value plan is a policy that offers cash beyond the death benefit. These policies have two parts: the death benefit gets some premium and the cash value gets some.
A cash-value policy can be expensive and can have high management fees, death and expense charges, as well as administrative costs that may include agent commissions. This is why you might want to reconsider purchasing a cash value life insurance policy. These commissions can sometimes amount to 130% to 150 percent of your first year’s premium. This may be considered a high investment price.
Qualified retirement plans such as a pension plan or 401(k) that you receive through your employer generally do not require any commission to be enrolled in. This does not mean there are no fees for a qualified retirement plan, such as a Roth, or a 401 (k). To ensure that you fully understand the costs of any retirement plan, you should pay attention to its terms.
The performance of a 7702 plan compared to other retirement plans will depend on how much you invest in the plan. It doesn’t matter what plan you choose, it’s a good idea understand the investments in which your money is invested.
Questions frequently asked
What should I do if someone attempts to sell me a plan with 7702?
A life insurance agent or financial planner should not refer to a cash-value life insurance policy as a “7702 plan”. However, while cash value life insurance policies are a good way to save for retirement, the policyholder should look into other ways of saving before purchasing one.
How can I tell if a cash value policy in life insurance that I’m looking at is compliant with the Section 7702 rules?
Almost all cash value life insurance policies conform to this section of tax code. In today’s financial market, policies that are outside this area of the law are almost nonexistent. This code is the only requirement for any reputable life insurance company to offer policies. This code is very unlikely to be violated. The life insurance company should clearly state that a policy fails to meet these criteria in its marketing materials.
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