Most people who looked for the best life insurance policy and came across 7702 plans were confused. The ambiguity stems from some sources mistakingly calling 7702 plans retirement plans.
A Section 7702 plan is not a retirement plan. In fact, it is a life insurance policy with certain tax advantages for the policy owner.
To dispel doubt, in today’s article, we will cover the following:
- What is a 7702 plan?
- How do 7702 plans work?
- What are the requirements for 7702 plans?
- What are the differences between a 7702 plan and a retirement plan?
- What is the best cash-value life insurance policy?
- What is the ultimate way to be financially independent?
Let’s get started!
What Is a 7702 Plan?
The 7702 plans are life insurance policies named after a section of the Internal Revenue Code. They can be leveraged for certain tax advantages.
Actually, all life insurance policies could be called ”7702 plans” because all of them are covered by Section 7702 of the Internal Revenue Code (IRC).
Tax code 7702 regulates how the federal government taxes income from a life insurance contract. An IRS 7702-regulated insurance policy will maintain tax benefits when appropriately designed.
Life insurance can be beneficial and helpful if you choose the right policy and understand how it works.
We can definitely refer to 7702 plans as ”cash value life insurance policies”. A 7702 plan is a tax-deferred life insurance policy that builds cash value over time.
These plans have higher premiums than term life insurance policies. Higher premiums help you build cash value and pay off the cost of insurance faster.
So, when deciding whether you should buy a term or cash-value policy, don’t just look at the monthly premiums. Much more important is what you get for the money you pay. And, with cash-value policies, you have way more opportunities and advantages.
Why is there a ”plan” in the name, then? Well, it’s mostly just a marketing term that some life insurance companies use to sell policies that can be used instead of a retirement plan.
A quick overview before we move on:
- 7702 plans are not individual retirement accounts. Instead, a 7702 plan is a cash-value life insurance policy named after Section 7702 (IRS Tax Code).
- People feel bad about life insurance policies because they don’t have enough information, knowledge, and research. That’s why we are going deep into analysis to make everything clear.
How Do 7702 Plans Work?
Since 7702 plans and cash value policies are the same, they also work the same way. These are the steps:
- A person signs a contract with the insurance company and becomes a policyholder (insured).
- The insured person pays premiums according to the agreed terms.
- Premiums go toward the funding of the cash value and death benefits.
The best part? The cash value grows on a tax-deferred basis because it’s not reduced by taxes every year.
Furthermore, the income withdrawn from the cash value and death benefit is also tax-free.
That means you can use your policy as a retirement income replacement, and it won’t be considered taxable income. And you can help your loved ones when you are gone because they will receive a death benefit and again – won’t have to pay taxes.
What Are the Requirements for 7702 Plans?
If you want to receive tax benefits, your cash value policy must meet a few conditions outlined in Section 7702. There are two tests: the cash value accumulation test (CVAT) and the guideline premium and corridor test (GPT).
- The cash value accumulation test (CVAT), according to the U.S. House of Representatives Office of the Law Revision Counsel, means that ”the cash surrender value of such contract may not at any time exceed the net single premium which would have to be paid at such time to fund future benefits under the contract.”
- The guideline premium and corridor test (GPT) requires that ”the sum of the premiums paid under such contract doesn’t at any time exceed the guideline premium limitation as of such time”, according to the same counsel section.
If life insurance contracts fail either of these two tests, the money you get from the policy will be taxed. Similarly to tax-qualified retirement plans, you might face a 10% penalty before 59 1/2 years.
What Is the Difference Between a 7702 Plan and a Retirement Plan?
We already mentioned that a 7702 plan isn’t a retirement plan, and here are the key differences:
- You can use the cash value from the 7702 plans during your life. With typical retirement plans, you don’t have a cash value.
- After the policyholder dies, the policy pays out the death benefit to the beneficiaries. On the other hand, the beneficiaries receive the remaining account value as an inheritance with retirement accounts.
- Taxes are calculated differently. The cash value is always tax-free and tax-deferred in a well-designed policy. Life insurance premiums are usually paid with after-tax dollars, and these funds you can withdraw tax-free before taking passive income from the tax-deferred portion. Money from employer-sponsored retirement plans like 401(k) is only tax-deferred. This means that you won’t pay taxes when you put money into an account, but it will be subjected to income tax when you withdraw it. This further means you’ll pay more taxes with these plans.
A quick overview before me move on:
7702 plans are not retirement accounts. Still, cash-value life insurance can be used as a savings account or retirement plan.
For instance, whole life insurance (one type of cash value insurance) is a better option for ordinary income in retirement than qualified retirement plans like a 401(k) and Roth IRA.
Here’s what you should know about whole life insurance.
What Is the Best Cash Value Life Insurance Policy?
Cash value life insurance is not limited to one type of policy. The cash value component can perform in various permanent policies, including whole, variable, indexed, and universal life insurance.
Here is an overview of cash-value life insurance policies.
- A whole life insurance policy is a permanent life plan, meaning it provides coverage throughout your entire life. These policies build cash value, have a guaranteed death benefit and premiums, and offer huge growth potential.
- Variable insurance is also a permanent life plan. The payout amounts from these policies are determined by the performance of the underlying securities in the policy. Variable policies offer tax advantages whether or not the underlying investments perform well, but they are the riskiest cash-value life insurance policies.
- Indexed life insurance policies have a cash value component in addition to the death benefit. The money inside this policy can earn interest based on a stock market index chosen by your insurance company. Funds don’t earn a fixed interest rate (like with whole life) but usually come with an interest rate guarantee.
- Universal life insurance offers a savings component and lifelong protection, like other permanent life insurance plans. The difference is that universal life allows you to adjust the death benefit and adapt the premiums.
Let’s see why most people choose whole life insurance.
Whole Life Insurance
A whole-life policy is designed to cover you for your entire life. As long as you pay premiums, the policy will pay a death benefit.
The list of benefits is long, but we’ve highlighted the best ones.
Premiums Stay the Same
With term insurance and some other types of permanent coverage, you don’t have a fixed premium. However, with whole life, the premium you pay never increases. This is why it is advised to get a whole life policy when you’re younger and healthier: lower rates will stay for life.
Whole Life Policy Builds Cash Value at a Guaranteed Rate
With a whole-life policy, you grow tax-deferred cash value at a guaranteed rate annually. Can you imagine your policy making you money even when you don’t work?
Death Benefit Is Guaranteed
Your whole life policy is guaranteed to pay out at least the face value. There is no risk of losing your money.
You may also receive dividends if you buy a whole life from a mutual company. You can distribute those dividends as cash, use them to pay premiums, or reinvest them.
Believe it or not, it’s not the end of the list. We saved the biggest reason why you should get whole life insurance for last. Let us introduce you to the Infinite Banking Concept.
The Ultimate Way to Achieve Financial Prosperity
Lifestyle Banking (or Infinite Banking Concept) is the process of becoming your own banker by growing the liquid cash value inside a well-designed whole life policy while borrowing against it. You can use borrowed money to fund major expenditures, emergencies, and outside investment opportunities.
Therefore, you break free from traditional banks because you now have your own bank. Utilizing your whole life insurance policy provides competitive, safe growth rates, tax sheltering, various protection and life benefits, and continuous compounding of liquid assets (even while borrowing).
Thanks to the whole-life policy, you have lifelong protection for your family and friends and a guaranteed death benefit. Moreover, you can leverage the value of a dividend-paying policy and become your own banker – i.e., financially independent.
You can easily create cash flow, lend money to others, and build wealth. Whatever financial situation may occur, you will be appropriately insured and secured.
Watch Our Free Masterclass
We’ve outlined how cash value insurance works and how it can be beneficial when implemented correctly.
If you’d like to learn more about how whole-life insurance policies can be used as investment vehicles, we invite you to watch our free masterclass and learn everything you need to know about starting your own bank.
Get ready to learn more about making, using, and multiplying money just like banks do. You’ll be ready to set up your own banking system in just one hour.