• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

The College Investor

Student Loans, Investing, Building Wealth

  • About
  • Podcast
  • Research
  • Contact
  • Save For College
      • How To Start

      • How To Save For College
      • How To Pay For College
      • What Is the Average Cost of College?
      • What Is A 529 Plan and Where to Open One in Your State
      • How Much Should You Have In A 529 Plan By Age
      • How To Use A 529 Plan For Private Elementary And High School
      • What Are Qualified Expenses For A 529 Plan (And What Doesn’t Count)?
      • The Best Brokers To Open A 529 Plan
      • Tools + Accounts

      • 529 Plans: The Ultimate College Savings Plan
      • 529 Plan Contribution Limits
      • Prepaid Tuition Plans | What To Know
      • Understanding And Using 529A ABLE Accounts
      • Using A Roth IRA To Save And Pay For College
      • FAFSA Deadlines for Financial Aid
      • CollegeBacker Review
      • Upromise Review
      • UNest Review
      • Other Options

      • Student Loan And Financial Aid Programs By State
      • The Guide To Military And VA Education Benefits
      • How To Fill Out The FAFSA
      • How To Find College Scholarships
      • The Best College Scholarship Search Websites
      • How To Find Grants To Pay For College
      • Pell Grants: What They Are And How To Qualify
      • Understanding Federal Work-Study
      • How To Use A 529 Plan If Your Child Doesn’t Go To College
  • Student Loans
      • Borrowing

        • How Student Loans Work
        • How To Apply For A Student Loan
        • Best Student Loans And Rates In January 2023
        • 10 Best Private Student Loans Of January 2023
        • Best Student Loans To Pay For Graduate School
        • Best Student Loans To Pay For Medical School
        • Parent Loans To Pay For College
        • No-Cosigner Student Loan Options
        • Guide To Income Sharing Agreements (ISAs)
        • Best International Student Loans
      • Get Out Of Debt

        • Best Student Loan Refinance Companies In January 2023
        • Best Student Loan Repayment Plans
        • Best Student Loan Refinancing Bonuses And Promotional Offers Of January 2023
        • Student Loan Forgiveness Programs (The Complete List)
        • The Full List Of Student Loan Forgiveness Programs By State
        • Public Service Loan Forgiveness (PSLF)
        • Top Student Loan Scams
        • Average Student Loan Monthly Payment
        • Average Student Loan Debt By Year
      • Reviews

        • Credible Review
        • Splash Review
        • Ascent Review
        • Citizens Bank Review
        • Commonbond Review
        • Earnest Review
        • ELFI Review
        • Laurel Road Review
        • LendKey Review
        • SoFi Review
  • Investing
      • How To Start

        • How To Start Investing in High School
        • How To Start Investing In College
        • How To Start Investing In Your Twenties For 22 – 29 Year Olds
        • How To Start Investing In Your 30s For 30 – 39 Year Olds
        • How To Start Investing With $100 Or Less
        • How To Give Kids The Gift Of Stock
        • What Is Dividend Growth Investing
        • IRA Rollover Chart
      • Tools + Accounts

        • Best Online Stock Brokers
        • The Best Traditional And Roth IRA Accounts
        • The Best Robo-Advisors
        • The Best Investing Apps
        • The Best Places to Trade Options
        • The Best Places To Open A Health Savings Account
        • The Best Solo 401k Providers
        • The Best Self-Directed IRA Providers Of 2023
        • Best Cryptocurrency Exchanges
      • Reviews

        • Vanguard Review
        • Fidelity Review 2023
        • M1 Finance Review
        • TD Ameritrade Review 2023
        • Charles Schwab Review
        • Robinhood Review
        • Webull Review
        • Betterment Review 2023
        • Wealthfront Review
  • Earn More Money
      • Extra Income

        • 20 Best Side Hustles You Can Start Earning With In 2023
        • 53 Side Hustle Ideas To Make Money Fast
        • 100 Ways To Make Money In College
        • 80 Ways To Make Money From Home In 2023
        • 5 Quick Money Making Ideas (That Take Less Than 1 Hour)
        • 10 Interesting Ways You Can Make Money Driving
        • High-Paying Side Gigs That Earn $1,000 or More Per Month
        • The 10 Best Money-Making Apps
        • Paid Surveys: Earn Money For Giving Your Opinion Online
        • 10 Crazy Ways To Make $10,000 You’ve Never Heard Of
      • Build Wealth

        • 40 Passive Income Ideas You Can Use To Build Wealth In 2023
        • 3 Ways To Make $50,000 Per Year Without Working With Passive Income
        • How To Become A Real Estate Investor With Just $500
        • 15 Best Online Business Ideas
        • Residual Income: 7 Super Smart Ways to Build It
        • The Most Common Multiple Income Streams
        • How To Become A Real Estate Mogul With Only $10,000
      • Reviews

        • Fundrise Review
        • RealtyMogul Review
        • FarmTogether Review
        • AcreTrader Review
        • Swagbucks Review
        • Survey Junkie Review
        • TopCashback Review
        • DoorDash Review
  • Personal Finance
      • Banking

        • 10 Best High Yield Savings Accounts Of January 2023
        • 10 Best Money Market Accounts Of January 2023
        • 10 Best Free Checking Accounts In January 2023
        • Best Bank CD Rates Of January 2023
        • 10 Best Business Checking Accounts In February 2023
        • Best Online Banks Of January 2023
        • Best Credit Unions Nationwide Of January 2023
        • Best College Student Checking Accounts Of January 2023
      • Insurance

        • Best Life Insurance Companies
        • Renters Insurance
        • Car Insurance
        • Pet Insurance
        • Umbrella Insurance
        • Disability Insurance
        • Tuition Insurance
        • Travel Insurance
      • Credit Tools

        • Best Budgeting Apps
        • Cash Advance Apps
        • How To Get A Free Credit Score Report
        • Best Credit Monitoring Services For 2023
        • Debt Settlement: Inside The Secret World
        • Credit Repair Explained: Should You Pay For Help?
        • Best Personal Loan Companies And Lenders
        • Online Loan Companies To Borrow From Home
      • Tax

        • Best Tax Software
        • Free Tax Software
        • IRS Tax Refund Calendar
        • Common IRS Questions and Errors
        • Federal Tax Brackets
        • Capital Gains Tax Brackets
        • 401k Contribution Limits
        • IRA Contribution Limits
        • HSA Contribution Limits
  • Forum
  • Search
Home » Insurance » Life » What Are Section 7702 Plans (Are They Even Real Investments)?

What Are Section 7702 Plans (Are They Even Real Investments)?

Updated: June 27, 2022 By Robert Farrington

Tweet
Share
Share
Pin
Email
Print

At The College Investor, we want to help you navigate your finances. To do this, many or all of the products featured here may be from our partners. This doesn’t influence our evaluations or reviews. Our opinions are our own. Any investing information provided on this page is for educational purposes only. The College Investor does not offer investment advisor or brokerage services, nor does it recommend buying or selling particular stocks, securities, or other investments. Learn more here.Advertiser Disclosure

There are thousands of financial products and services out there, and we believe in helping you understand which is best for you, how it works, and will it actually help you achieve your financial goals. We're proud of our content and guidance, and the information we provide is objective, independent, and free.

But we do have to make money to pay our team and keep this website running! Our partners compensate us. TheCollegeInvestor.com has an advertising relationship with some or all of the offers included on this page, which may impact how, where, and in what order products and services may appear. The College Investor does not include all companies or offers available in the marketplace. And our partners can never pay us to guarantee favorable reviews (or even pay for a review of their product to begin with).

For more information and a complete list of our advertising partners, please check out our full Advertising Disclosure. TheCollegeInvestor.com strives to keep its information accurate and up to date. The information in our reviews could be different from what you find when visiting a financial institution, service provider or a specific product's website. All products and services are presented without warranty.

Section 7702 plans

In the U.S., there are a slew of tax-advantaged retirement accounts that form a veritable alphabet soup of acronyms. The complexity gives room for salespeople to pitch “fake” retirement accounts to unsuspecting consumers. 

"Section 7702 plans" are a prime example. Section 7702 of the Internal Revenue Service governs the taxation of life insurance policies. And it's true that some of the tax advantages within Section 7702 mimic the advantages of qualified retirement plans. 

But these life insurance plans aren’t alternatives to employer-sponsored retirement plans or other qualified plans. They are a different product altogether. Here’s what you need to know about 7702 plans.

Table of Contents
Section 7702 Plans Aren’t Retirement Accounts
What Are Cash Value Life Insurance Policies?
Understanding Section 7702 Plans
Are 7702 Life Insurance Policies Bad?
Should I Cancel My Section 7702 Plan?
Final Thoughts

Section 7702 Plans Aren’t Retirement Accounts

"Section 7702 plan" is just a fancy term that some insurance salesmen use for a cash value life insurance policy. They are sometimes called "Section 7702 retirement plans," but these are not qualified retirement plans. 

The nomenclature is a marketing moniker designed to mislead people into viewing the life insurance policy as a viable alternative to legitimate tax-advantaged retirement accounts.

Again, the 7702 “retirement plan” is not a qualified retirement account. It’s a life insurance policy — and typically an expensive one.

What Are Cash Value Life Insurance Policies?

Cash-value life insurance policies are life insurance policies with a savings component. The savings build up into cash value. The value tends to increase over time because the “cash value” held inside the policy earns interest or grows due to investment growth.

Growth in the policy account is tax-deferred. That means it's not taxed until the funds are withdrawn from the policy account.

All of these policies require policyholders to pay monthly premiums to keep the life insurance in place and build up the cash value of the policy. All the policies pay a death benefit when the policy owner dies. Over many years, the savings component of the life insurance builds up and becomes invested.

The exact investment and returns vary based on the type of insurance policy. Here are three of the most common cash value insurance policy types:

Whole Life

Typically whole life policies have a guaranteed minimum growth rate for the cash value in the policy. But they may grow somewhat faster depending on the performance of the fund. Once the cash value is adequately built up, the cash value can be used to pay the monthly premiums.

Variable Universal Life

Under a variable universal life policy, the cash value in a policy may increase or decrease depending on how the policy is invested. Policyholders may have control over how the funds are invested. The potential volatility may cause problems for people who intended to take loans from the policy to fund living expenses.

Indexed Universal Life

The cash value in indexed universal life policies is tied to a specific stock market index. In these policies, the rate of return on cash value will not dip below 0%. But the upside is limited compared with variable universal life.

Understanding Section 7702 Plans

Section 7702 of the Internal Revenue Code lays out the tax rules for “cash value” life insurance policies. Cash-value life insurance policies (also called whole life or guaranteed life policies) are first and foremost life insurance policies. If the policyholder dies, their beneficiary receives a large payout from the insurance company.

Almost all cash value life insurance policies are Section 7702-compliant. By complying with the rules in Section 7702, the cash value inside the life insurance policy can grow tax-free. 

Additionally, account holders can “borrow” against the built-up cash value inside the policy, either to pay the premiums or to fund living expenses. This “tax-free loan” may be used to hoodwink unsuspecting consumers into seeing a cash value life insurance policy as a viable alternative to a retirement account.

Related: 401k Loans: The Good, The Bad, And The Ugly

Are 7702 Life Insurance Policies Bad?

Cash-value life insurance policies aren’t necessarily bad products. But they aren’t a great fit for the typical person. Due to high front-loaded fees and commissions, the cash value grows slowly for several years. This may explain why 20% of people allowed their whole life policy to lapse in the first three years in the most recent study by the Society of Actuaries.

Cash value life insurance policies do have tax advantages. But most people don’t have adequate income to cover all their expenses and max out their real retirement accounts. In 2022, a working person with an above-average $80,000 per year salary and a high-deductible health insurance plan for their family is eligible for all the following deductions:

  • A $20,500 employee contribution to a 401(k)
  • A $6,000 contribution to a Roth IRA
  • A $7,300 contribution to a health savings account (HSA)

That’s $33,800 in tax-advantaged investment opportunities. When you consider other financial priorities such as paying off debt, buying a house, or saving for kids' college, a 7702 plan is unlikely to fit. 

But if you’re already knocking your financial goals out of the park, and you still have strong cash flow, a cash value life insurance policy can be a useful part of estate planning. But even those who fit the bills should consult with a fiduciary financial advisor before buying any cash value life insurance policies.

Should I Cancel My Section 7702 Plan?

Cash value life insurance policies aren't typically the best purchase initially. But it's important to understand that the fees are usually front-loaded. So an older life insurance policy may be valuable if you can afford to pay the premiums. 

This post from CFP Michael Kitces helps explain scenarios where keeping the policy in place could make sense. Again, you may want to work directly with a CFP to help you analyze whether to keep the policy.

Final Thoughts

Overall, Section 7702 plans are legitimate life insurance products. And they have a place in certain financial plans. 

But profiteers may try to sell you a high-cost policy even if it isn't the right fit. Ultimately, it's up to you to learn about these plans and carefully consider their advantages and drawbacks before you buy a policy you don’t need.

Robert Farrington
Robert Farrington

Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.

He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.

He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.

What Are Section 7702 Plans (Are They Even Real Investments)?
Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities.
Comment Policy: We invite readers to respond with questions or comments. Comments may be held for moderation and are subject to approval. Comments are solely the opinions of their authors'. The responses in the comments below are not provided or commissioned by any advertiser. Responses have not been reviewed, approved or otherwise endorsed by any company. It is not anyone's responsibility to ensure all posts and/or questions are answered.
Subscribe
Connect with
I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree
Notify of

I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree

0 Comments
Inline Feedbacks
View all comments

Primary Sidebar

Robert Farrington will teach you how to get out of student loan debt and how to start investing.

Hi! My Name is

America's Millennial Money Expert

Welcome to The College Investor. We're here to help you escape student loan debt so you can start investing and building wealth for the future

Our expert guides, reviews, and more are designed to help you achieve your financial goals.

Want to learn more? See what's in my wallet.

As Featured In

Social Media

Popular Posts

Side Hustling

53 Side Hustle Ideas To Make Money Fast

Best Side Hustles

20 Best Side Hustles You Can Start Earning With In 2023

Crazy Ways To Make $10,000

10 Crazy Ways To Make $10,000 You’ve Never Heard Of

Make $50,000 Per Year

3 Ways To Make $50,000 Per Year Without Working With Passive Income

Student Loan Scams

Top Student Loan Scams

Net Worth of Millennials

Average Net Worth Of Millennials By Age

Ways To Get Student Loan Forgiveness

Student Loan Forgiveness Programs (The Complete List)

529 Plan By Age

How Much Should You Have In A 529 Plan By Age

Passive Income Ideas

40 Passive Income Ideas You Can Use To Build Wealth In 2023

Make Money From Home

80 Ways To Make Money From Home In 2023

Ultimate Guides

529 Plan Guide

529 Plans: The Ultimate Guide To College Savings Plans

Student Loans and Financial Aid By State

Student Loan And Financial Aid Programs By State

Student Loan Advice

The Definitive Guide To Student Loan Debt

Student Loan Forgiveness By State

The Full List Of Student Loan Forgiveness Programs By State

newretirement

How to Start Saving Now: The College Graduate’s Guide to Saving for Retirement

Latest Research

How much to file taxes

Tax Survey: How Much People Paid To File And The No.1 Tax Software They Used

Inflation survey

Side-Hustles To The Rescue: Survey Shows 86% Stressed About Money & Inflation

students choose to work survey

75% Of Students Would Still Choose To Work Even If They Didn’t Have To

Institutional Merit Grants

Who Gets Institutional Merit Grants At Private Colleges?

Resume Student Loan Payments

Survey: Even With Higher Expenses, Most Student Loan Borrowers Are Ready To Resume Payments

Footer

Who We Are

The College Investor is an independent, advertising-supported financial media publisher, focusing on news, product reviews, and comparisons.

Connect

  • Contact Us
  • Advertise
  • Press & Media

About

  • About
  • Our Team
  • Podcast
  • Editorial Guidelines
  • How We Make Money
  • Archives

Social

Copyright © 2023 · The College Investor · Privacy Policy ·Terms of Service · DO NOT Sell My Personal Information

wpDiscuz