7702 Plan: Always a Bad Idea or Simply Misunderstood?

Several years ago (the details as to exactly when are a little hazy), someone somewhere within the insurance industry made a fascinating discovery, which gave way to something referred to as a 7702 plan.

What might this fascinating discovery be? A tax loophole? The introduction to a new financial product that would bring salvation to us all?

7702 plan a bad ideaNo…not even close. Instead, this very creative individual made a half-correct observation about how things get named after Internal Revenue Code (IRC) and decided to make their very own special financial savings vehicle: the 7702 plan. So, what is it?

Not All That Exciting

Allow me to deflate the big balloon of anticipation. It’s simply a life insurance contract. In truth, there is no such thing as a 7702 plan. But, to be fair, there’s also technically no such thing as a 401k plan.

The name is a colloquialism in reference to the IRC that establishes the particulars of the plan.

IRC 7702 speaks to the taxable implications of life insurance contracts (tricky, tricky). You see, some people feel the need to further inflate the importance of an idea.

Basically, using life insurance to intentionally create cash value is being called  “the 7702 Plan” because it sounds so much cooler and more exclusive, prompting some people (you know who you are) to jump on board.

So…is it Legal?

Here’s the issue; IRAs and 401ks, which also are not themselves legally defined “plans,” both require the establishment of an account (a custody or trust account) to manage the funds as far as actual legislation is concerned.

That account is what gives the products their tax benefits.

With life insurance, the product itself contains the benefits. There is no special “account” per se.

There’s likely nothing flat-out illegal about referring to the ownership of life insurance to make use of its cash value features as a 7702 plan. However, based on the limited amount of personal finance knowledge most people have (and that includes agents/brokers, registered reps, and IARs very much included), this is one area where mischievousness has a lot of leverage and advantage.

Of course, the pendulum can swing both ways.

Just because an account is a 401k, IRA, etc. doesn’t necessarily make it a good idea. All you are essentially doing there is establishing a custody or trust account and paying the custodian or trustee fees to hold onto your assets. The account has tax favorable benefits so long as it complies with the appropriate IRC.

Now, there is a difference as regards the official establishment of that account.

The custody or trust account is required for the other accounts that are sometimes referred to as “qualified” (though this is a bit of a misnomer as a lot of people refer to IRAs as qualified, which is incorrect since qualified is a reference to the Employee Retirement Income Security Act–ERISA).

Not Illegal, but not Exactly Legitimate

7702 plans are basically a marketing angle, but then again, isn’t everything else these days?

The problem is more in the way agents present the plan. There are a collection of agents (and insurance companies) that have embraced the idea of talking people into liquidating their IRAs in order to fund their “7702 plans.”

While I won’t categorically declare this wrong, there’s not much evidence to suggest that it’s right.

It’s fine to point out that cash value life insurance has certain tax favorable benefits under IRC 7702 and that those benefits are hugely beneficial, especially for those whose incomes place them far beyond Roth IRA eligibility (yes, the back-door IRA method works, but $5,000 a year for someone who earns over $100,000 a year sort of makes all IRAs somewhat useless).

But, when someone starts pitching the sale of life insurance as the establishment of a 7702 Private Plan, a line has certainly been crossed.

The benefits exist, and they are huge, but this sort of marketing gimmick is what gets us in trouble and makes everyone’s lives more difficult.

A Little Finger Wag at the Industry

Again, we’re not exactly sure who to blame for the origination of this idea, but we’ve seen many of examples of agents and companies embracing it (I once received an illustration to review for a guy from Northwestern Mutual that had “7702 Plan” displayed on the cover page).

For a while, a lot of agents were hawking Indexed Universal Life as the 7702 Plan (after all, it had something to do with the stock market). We wonder why FINRA and the SEC want to regulate these products.

The idea of marketing insurance in this way was someone’s really creative but really bad idea.

There have been a lot of creative marketing pitches out of the insurance industry – from magically vanishing premiums to whole life as a 401k plan to 7702 plans.

But, if someone approaches you and starts to “recommend” that you move to a 7702 plan, best to shake your head and chastise them for their ridiculousness. Then, shoot us an email.

25 Responses to “7702 Plan: Always a Bad Idea or Simply Misunderstood?”

  1. Mike says:

    Hello, I have recently been approached by some brokers from Transamerica regarding this 7702 plan. They promised 8-12% indexed growth that will have no way to go but up even when the economy is doing poorly. They stated that it was a life insurance as well as a retirement plan, although I was confused as to how it could be both at the same time. I have a friend who recently signed up for the program and would like to gain more information as to why it is not a good idea to invest in it. I was wondering what the benefits are vs the downsides and what makes a 401k or some other retirement “plan” better by comparison. I was trying to look for it in the article, but I couldn’t find a clear explanation. Thank you for your time.

    • Brandon Roberts says:

      Hi Mike,

      You aren’t going to get 8-12% on the plan. Transamerica will be setting you up their Indexed Universal Life policy. It’s not a bad policy, but it’s not a superlative one either. If you want an idea on other options that exist for this product check this post out for indexed universal life income comparisons.

      The truth is, it’s not really a plan. The person suggesting this is simply placing money in a cash value life insurance product that will accumulate over time and will be able to generate retirement income. The design of this policy will drive the overall performance. The death benefit should be minimized to it’s lowest legally allowed level. This will ensure optimal cash value and income performance.

      The idea is actually a good one. Calling a specialized plan is a little misleading. The suggested returns are over hyped. We’d suggest that 6% is roughly where you’ll end up long term. And based on the risk exposure (which is very small compared to other securities) this isn’t bad at all.

      If you’d like answers to more specific questions, please don’t hesitate to reach out to us, you can contact us from this page here.

  2. Ellen says:

    Thank you for the post. I have a question.. do you suggest it?

    • Brandon Roberts says:

      Hi Ellen,

      What we take issue with is the presentation of life insurance as some special secret plan. It’s not, it’s simply life insurance.

      We very much condone the use of life insurance for it’s cash value (i.e. life insurance as an asset class). We simply question the ethics of someone who feels the need to try and sell life insurance by calling it something other than life insurance, which potentially crosses a legal line in most states.

  3. Steven Potts says:

    If the benefits of LIRS (Life Insurance Retirement Strategy is so poor why do people like GE’s Jeffrey Immelt put so much of their compensation into such programs. You would have to agree, someone making $21 million a year probably has some pretty good advisors helping to determine where to put their money.

    • Brandon Roberts says:

      We’ve written at length that life insurance can be used as an asset class, and are not suggesting here that it can’t be. We’re simply pointing out that concealing the sale of life insurance behind the idea that it’s some super secret trick of the super wealthy is foolish. That’s all.

  4. Oscar Garcoa Jr says:

    I have been approached twice this year by people I know very well in regards to the 7702 “plan”. I am weary of how the people present the life insurance plan blanketed giving the image that is like a 401k plan or and IRA.

    If it seems sketchy it probably is. I will find out more this saturday and give you guys the scoop.

    • Brandon Roberts says:

      Hi Oscar,

      Thanks and we look forward to the information.

      • Dean Victors says:

        I’d rather put my money in a Life Insurance Retirement Strategy than a 401k. I recently went through a hardship that is not labeled by what my 401k defines as a hardship so I unable to get my money. a 401k is probably the most horrible type of investment. It is outdated.

        • Brandon Roberts says:


          We’ve never said that you shouldn’t place money in life insurance as savings strategy (quite the contrary) we’re just pointing out that attempting to trick people into buying life insurance by calling it a special account is both illegal and unethical.

  5. Sergio says:

    Hello gentlemen or ladies, depending on who replies to this post.
    I’ve recently been discharged from the United States Marine Corps after honorably serving nearly 23 years. I was approached by one of these companies mentioned above. I’m sure hoping that I haven’t been duped because I became a client and now an associate.
    It seems to be such an outstanding product the “7702 Plan” or the IUL’s we promote. After reading this post, I’m not sure if I was or not. I take a lot of pride in my honesty and ethics, and would hate knowing that I was setting up my fellow Marines, friends, and family members with anything that is not ethical. Our parent company (Aegon) is hugely successful, in the Forbes 100, well that’s what we are promoting anyway. I’m not sure to be quite honest. I guess I should have done more research prior to getting involved with anything.
    I believe in the product,and when I give my pitch I never promise 8-12% returns, though our bread and butter product has apparently garnered nearly 9.5% over the last 21 years.
    So my question is, if I was to remain an associate, what should/n’t I be advising my potential clients? I understand that the IRC 7702 is just a code and not a plan, and that I am a basic Life Insurance salesman. I want to base my presentation with facts, not mumbo jumbo. Thank you for your time and hopefully your response.


    • Brantley Whitley says:

      Hi Sergio–Thanks for your comment!

      Using life insurance as an asset class to save money for retirement, a future purchase or just as a general place to warehouse cash is a great idea. In fact, we’ve built our entire practice around that idea. However, what we disagree with is the sensationalism that many use when marketing the product. That’s our gripe with calling it a “7702 plan”. The concept is sound but let’s just tell people what it is without any hesitation. We can prove to people that it will work and we can do our best to make it work in their favor by minimizing the cost of insurance and NOT overestimating the expected return.

      If you are going to offer IUL to your clients, you should find Brandon’s post from yesterday on the subject of IUL interest rate assumptions very helpful. Here is the link

    • Jenny says:

      Hi Sergio,

      I am a client of Transamerica/Aegon. 2 years ago, a friend of mine who I have known for a long time set me down helped me plan for my son’s financial aid. At that time my son was 15, I had about $50K company stocks, after analyzing, my friend told me that this stocks will be considered asset and it will prevent my son qualifying grants which is free financial aid. So I followed my friend’s advice to open a Indexed Universal Life by Transamerica. This year my son is accepted by OSU, out of $21K tuition, my son gets $20K/year free grant all thanks to my friend’s advice. We gradually liquidated my stocks and move the money to IUL, in the past 2 years, my return were both over 10%. I’m truly happy that I followed my friend’s advice. I think your company Aegon/Transamerica is doing a good thing there.

      • Sergio says:

        Hi Jenny. Wow that’s great news. I’m still with the company myself, as an agent and client. I’m actually excited for my anniversary date to roll around (Jan 2016) to see what the return is going to look like. Heck if it breaks double digits, I’ll be one happy camper for sure. Your post definitely made me feel better about my decision to stay. Here’s to continued double digit returns! Cheers!

    • Justin W. says:

      I work with a company that is non captive, meaning that we don’t have our own products but have many different companies whose products we readily have accessibility to. It is our goal to fit the absolute best product for the right person. Just like with cell phone companies, a company that only offers their own product will try to twist what you need to fit their product. Having said that, there are many benefits to using a universal life product. I do have one myself and have averaged over the last couple years 7 and 9% I actually like the fact that there is life insurance. I won’t get much further than that. The funny thing is, Dave Ramsey, who I think has done a lot of good as far as raising awareness about getting out of debt, tries to say the a IUL or other life insurance products are not a good way to go. The funny part is, he says, “But term, invest the rest.” As was mentioned in earlier posts, the structure of a life insurance based product is crucial. It can either be a very expensive life insurance plan or it can be a way to accumulate a cash value at a good average rate of return without the risk of major losses as the market goes down. (Indexed option. Variable option you would lose just like the market does.) If done right as a cash accumulation vehicle, you will want to have the life insurance amount decrease in proportion to what you have contributed or earned in interest. My major pet peeve is when people try to cookie cut a financial plan for people. There are different goals and situations that always need to be considered in EVERY financial plan. 401k is not a horrible way to go. I would advise knowing what all the fees are and what your ACTUAL rate of return is, not your average that your statement will try and show. A Roth is not a bad way to go either but there is a reason it is called the poor mans investment. These are some of the thoughts that I cover with people. Overall, don’t just let someone steamroll you into buying a life insurance plan as cash accumulation vehicle but the same goes with any other investment plan, including a Roth, 401k, annuity, or naked mutual funds. There are good and bad with all, just find the shoe that fits the best for you and know why it does.

  6. Beth says:

    Hello, I was told by a friend at work that the “7702 plan” is pre tax or tax free and that there is no penalty for taking your money out when ever you like. I’ve read nothing of such things on this post or others, was he making this up? Is it even possible to get into your life insurance?

    • Brandon Roberts says:

      Hi Beth,

      It’s not pre-tax as that would refer to a contribution that avoids income received to you in order to avoid paying taxes on it. Life insurance (which is all a 7702 Plan is) would receive funds post tax.

      It is true that the cash in a life insurance policy grows tax deferred and can be accessed tax free. It’s also true that anyone can access the cash in their policy whenever they want to for any reason and this distribution can be made without a taxable consequence. This isn’t because of a 7702 Plan (again no such thing exists). This is simply how life insurance works.

      • Justin W. says:

        One thing to note is that a life insurance plan meant to accumulate a cash value generally starts out very slow and then as time goes, IF funded and set up right, will take off and do amazing things towards the end. You cannot put in the minimal amount and expect it to be lucrative. You will need to max fund the life insurance for best results. A lot of plans were set up for the most life insurance possible and in turn had high costs and were just expensive products.

  7. Ingrid says:

    Hi Brandon,

    I came across this video the other day and I think this MIGHT be helpful for your readers. http://toronto.ctvnews.ca/mobile/video?clipId=603299&fb_action_ids=1426630910990275&fb_action_types=og.shares

    It seems that this mans “cash value” didn’t amount to much, even after 27 years. Not only that but he ended up with nothing…no life insurance OR savings. This can’t be good.

    • Brandon Roberts says:

      Hi Ingrid,

      Thanks for posting. This example is not an example of bad life insurance so much as it’s an example of bad policy implementation. At the likely age Mr. Gonzalez bought the policy, he probably should have been paying at least twice the amount of monthly premium he paid for the death benefit he had in force. That would have ensured cash growth and adequate funding for the death benefit.

      Since the news channel only interviewed him and received his side of the story, we don’t know what conversation ultimately took place. It’s unfortunate that he did not understand his policy, and it’s also unfortunate that he was not working with an agent/broker to regularly ensure the policy was functioning as anticipated. He does, however, have to share in some of the responsibility of his actions.

      Proper policy management would have avoided this situation. We’ve talked about its importance before (see here).

      • Michael says:

        Brandon, You seem to be overly concerned about using the phrase “7702 Plan’. Referring to (for example) an IUL by that phrase is merely a “curiosity” approach for a potential client to sit down for the, perhaps 54 minutes it might take to explain the concepts behind why an overfunded IUL would make a great retirement income tool vs. an IRA. Once a potential client has agreed to meet with an agent, the agent will, through the course of going through an illustration point out that the “chassis” for this wealth creation strategy is, in fact an Indexed Universal Life Insurance policy. Much of the strength of the product comes from the IRC 7702 provisions. My disclosures that we will be using an insurance contract are made very early on in the meeting. If an agent leads with, hey, come on over and I want to show you how to enhance your retirement using a life insurance contract, there would, on 99 out of 100 calls, be no appointment. Instead of villifying an agent for using a “curiosity approach” to get the appointment, it would be better to simply make sure there is appropriate and honest disclosure at the point of the appointment.

        • Brandon Roberts says:

          Hi Michael,

          To each his own. I think this approach is a colossal waste of time.

          I’ve also been approached by several who have been pitched or bought 7702 “plans” and i-n-s-u-r-a-n-c-e was scantly if ever discussed.

        • Justin W. says:

          I’m with you on this one Michael, people are quick to assume a lot of things. Unfortunately through the beginning stages of whole life and then Universal life products there were a lot of shady agents just out to get as high a commission as possible. Now people hear the term life insurance and they bolt. However, if you explain how it works and that the product is indeed life insurance then there is no issue. I usually have people really excited by the time we are done because it is that added protection that they needed, they just hadn’t thought about it.

  8. Rob says:

    Had mine for a bit over a year and my FF-IUL made 7% (in the first year!).

    There are a few problems here tho. 1)Unfortunately some agents will try to go for a quick sale by promising all the benefits of the IUL through minimum funding. Won’t work. You can’t drive a truck (policy) very far with a tiny tank (premium amount). You can however gradually increase the premium. We all start somewhere.

    2)An IUL is great! I think everyone needs one, but it shouldn’t be the only thing banked on.

    If properly structured and funded it will cover multiple things that can(WILL) happen in our life. Nobody likes to talk about what they would do should they be in a situation where they need income replacement, are not able to work because they get chronically ill, or even die. Nobody likes to look at that side of life, but we have to. Because once we find ourselves in any of those situations it will be too late (gofundme)…

    I don’t think an IUL was supposed to replace an IRA or 401k. Instead it offers a (IMHO) better avenue.

    No 59 1/2 rule

    No early withdrawal penalty (yes there is a surrender period, but an IUL is not an ATM. It’s a long-term choice)

    Tax advantaged

    Stock market gains at no risk

    Guaranteed floor (meaning when the maket tanks you will not get credited negative)-there is a track record, talk to your agent.

    • Brandon Roberts says:

      Hi Rob,

      Thanks for the comments. This information is not intended to suggest one stay away from life insurance of any sort. It’s simply to point out that the sales “pitch” that depicts life insurance as a 7702 Plan et. al. is a sign of shady sales practices.

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