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A Simple Guide on the 7702 Plan

When searching for the best life insurance policy to leverage, you probably came across the 7702 plan and felt confused. The ambiguity emanates from sources mistakenly calling 7702 plans retirement plans. But this is not really the case considering the 7702 plan is far from being a retirement plan.

In actual sense, it is a life insurance policy with certain tax benefits for the policy owner. It is a section of the Internal Revenue Code (IRC), and all life insurance policies could be called ‘7702 plans. And this is easy to see since all of them are covered by Section 7702 of the Internal Revenue Code.

For those with no idea about what we are talking about, the tax code 7702 regulates how the federal government taxes income from a life insurance contract. An IRS 7702-regulated insurance policy maintains tax benefits when appropriately designed. You can actually deem 7702 plans to be ‘cash value life insurance policies.

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Cash value life insurance plans come with higher premiums than term life insurance policies. This is quite fascinating considering the higher premiums help you build cash value and pay off the cost of insurance faster. No wonder you should consider more than just the monthly premiums when choosing between a term or cash-value policy.

Considering 7702 plans and cash value policies are similar, they also work the same way. You first have to sign a contract with the insurance company to become a policyholder. You have to pay premiums as per the agreed terms, and they go toward funding of the cash value and death benefits.

The good thing about this is that the cash value grows on a tax-deferred basis since it is not reduced by taxes every year. Also, the income withdrawn from the cash value and death benefits is also tax-free. What this simply means is that you can use your policy as a retirement income replacement, and it won’t be viewed as taxable income.

Hopefully, this simple guide can help you clear some of the doubts you might be having regarding 7702 plans before using it to your advantage.

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