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- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Section 7702 Plan
A section 7702 plan is a life insurance policy. The main purpose of life insurance is to protect your loved ones from financial hardship however some forms of life insurance can be used for investing and retirement.
So if you are searching for a retirement plan then the 7702 will not be of use to you.
When you see the name of the plan, 7702, understand it is an insurance plan sold under this name, the real plan will be a whole life policy or a universal life policy.
Experts warn us that some shrewd insurance firms use this tactic to sell life insurance.
As each type of policy handles the premiums you pay into the plan differently it is important to know which kind of life insurance you buy.
However, none of the life insurance policies will yield any type of tax-deferred savings plan such as a 401(K) or 403(b) plan.
If you are looking into a 7702 plan for retirement savings, then a 401(k) is a better one to settle for.
What is Section 7702
To retain their tax-advantaged status, in the Internal Revenue Code, section 7702 describes the criteria which the cash value life insurance policies must meet.
7702 section summarizes the guidelines for premiums paid and states the corridor and cash value accumulation tests that must be met in order for the cash value inside a permanent policy to grow on a tax-deferred basis.
The rules of section 7702 apply to any cash value life insurance policy that was issued after 1985. Therefore section 7702 is not a plan in and of itself but it is a code.
The term “7702 plans” is no reference to a qualified plan in any sense, and the same tax rules are applicable to any cash value life insurance policy you buy.
The importance of Section 7702
Section 7702 directs which types of cash value life insurance policies are eligible to receive tax-advantaged treatment hence it matters.
If in this section of the Internal Revenue Code a life insurance policy does not meet the criteria listed, then to the beneficiary both the growth of the cash value inside the policy and the death benefit will be counted as taxable income.
Since in present-day most life insurance policies meet the criteria of this code, this is hardly an issue for the policyholders.
In response to the large number of life insurance policyholders who were using cash value life insurance as a tax shelter, Section 7702 in the Internal Revenue Code was created.
Before 1985 many policies that were issued offered huge growth potential in their cash value component, and the IRS by implementing Section 7702 rules tried to put a stop to this.
After 1985, there are certain limits in life insurance cash values that must be followed for the purpose of retaining their tax-advantaged status.
What are Section 7702 plans?
As described earlier, Section 7702 “plans” do not really plan at all. They are independent, privately issued cash value life insurance policies.
Sometimes the insurance agents call it by this name so that clients understand that they were enrolling in a type of qualified plan.
But there is nothing qualified about Section 7702 plans, and they have no connection to 401(k) plans which are the real qualified plans.
A major difference between them is that 401(k) plans if it is a Roth plan, allow for pretax contributions, while 7702 plans are financed with after-tax money.
The IRS views them as a personal expense and not as a retirement plan contribution, so contributors to a 7702 plan cannot deduct the cost of the premiums that they pay.
With 7702 the cash value grows tax-deferred allowing the policyholders to take out tax-free policy loans from them. whether it is called a 7702 plan or not it is common for any cash value policy.
There are various policies that can be termed as a 7702 plan like it can be a whole life policy, a universal life policy, a variable universal life policy, or an indexed universal life policy.
Depending on which type of policy it is and the amount of premium that is paid into it over time decides the amount of cash value that accumulates inside the policy.
In the long run, variable policies have the potential for higher growth, but when the markets drop they can also decline in value.
Even if the underlying financial benchmark index that the Indexed universal life policies are tied to does not perform well, the policyholder’s cash value is guaranteed not to go down hence Indexed universal life policies are safer.
But they also do not have the same growth potential that the variable policies can have.
Regardless of what kind of policy is used, the death benefit with these plans, or policies, is always tax-free.
The difference between a 7702 plan and a retirement plan
A 7702 plan is a life insurance policy that has a cash value beyond the death benefit.
Some of the premia go to the death benefit and some of them go to the policy’s cash value when the payment of premium is done into these kinds of policies.
These policies can come with expensive management fees and agent commissions, so it is an important reason why one may want to reconsider buying a cash-value life insurance policy for the purpose of investing.
Sometimes these commissions themselves total to 130 % to 150 % premium of the first year, which may be viewed as a high price for the investment.
While generally for qualified retirement plans, like a 401(k) that is received through your employer, you don’t pay any commission but you need to pay to enroll in the plan.
This does guarantee that all the other plans like a 401(k) or other qualified retirement plans, such as a Roth account do not have any fees involved.
To ensure that you understand the cost of the plan always pay close attention to the terms of whatever retirement plan you consider.
It completely depends on the investments made with the funds you contribute to the plan to decide how well a 7702 plan performs compared to other retirement plans.
Conclusion
You need to know that any life insurance salesperson or financial planner who refers to a cash value life insurance policy as a 7702 plan is incorrect.
Before buying a policy for the purpose of saving for retirement the policyholder should probably look at other avenues, even if cash value life insurance policies can be used for retirement savings.
No matter which plans you choose, it is a good idea to have a firm and clear understanding of the investments your money is put in.
