Understanding a Section 7702 Plan: Tax-Free Retirement
A Section 7702 plan might sound like a retirement plan, but in reality, it doesn’t fit into this category. Instead, this is a life insurance policy with certain tax advantages to the policyholder.
What does this mean in practice, and do I need a 7702 plan?
We’ve explained everything you need to know about the “7720” life insurance policies in plain terms – so, let’s dive right into it.
What Is a 7702 Plan?
A 7702 plan is a tax-deferred life insurance policy that builds cash value over time in addition to the death benefit. This type of life insurance is also known as a cash value life insurance policy.
So, if you’re in search of a retirement plan, a 7702 plan can be a good alternative that can provide a tax-free income stream at retirement.
The “plan” part of the name is merely a marketing term that some financial planning & insurance companies use to sell life insurance as a retirement plan alternative, comparing it to the typical retirement plans like 401 (k) or IRA. Remember: There’s no such thing as 7702 traditional retirement plans.
How Does a 7702 Plan Work?
7702 plans work like other life insurance contracts in a cash value policy – because that’s what they are. Provided that they meet certain regulations (outlined by Section 7702, hence the name), some of the premiums you pay can be used to build cash savings, while some of the premiums go to the death benefit and cost of insurance.
Therefore, 7702 plans function in the following way:
A person signs a contract with the insurance company and becomes insured, i.e., becomes a policyholder. Depending on the agreed terms, the policyholder pays premiums that go towards the funding of the cash value and death benefits.
The cash value will be tax-free while it’s growing, which is known as “tax-deferred” growth because it’s not being reduced by taxes every year. The income withdrawn form the cash value will also be tax-free. The family of the policyholder is paid the death benefit after death tax-free as well. Some also call 7702 LIRPs or life insurance retirement plans which you can learn more about here.
What Is a Cash Value Life Insurance Policy?
The cash value component of life insurance policies refers to the part of your life policy that earns interest and may be available for withdrawal in certain cases.
Life insurance policies that can qualify as cash value life insurance include: