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?

No…not even close. Instead, this very creative individual made a half-correct observation about how things get named after the Internal Revenue Code (IRC) and decided to make their very own special financial savings vehicle: the 7702 plan. So, what is it?

The 7702 Plan Is 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 (IRS code 7702 in this case)  that establishes the particulars of the plan.

IRS code 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.

What's Legal Under IRS Code 7702?

Here’s the issue; IRAs and 401ks, which also are not themselves legally defined “plans,” both require the establishment of an account (custodial 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. Here's a podcast episode that we uploaded to youtube to make it easier for you to hear (if you want to hear us talk more about the 7702.

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 or bad idea for that matter. 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).

Using Tax Code 7702 Is Clever

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.

Last Word: Is the 7702 a Good Idea?

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? Deceptive marketing draws the scrutiny of regulators, selling life insurance as a 7702 plan is certainly walking right up to the line of what's acceptable.

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

41 thoughts on “7702 Plan: Always a Bad Idea or Simply Misunderstood?”

  1. 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.

    • 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.

      • a person giving you advice on insurance without a license is ILLGAL how ever! So you may say 7702 or 401, 403b, Roth are not illegeal, because they are just tax codes to help IRS to decide how to tax your money.

        If you had the proper education you would see most of these index have paid out what they are saying. LOOK AT THE MONEY GROW IN THEM!!!!!!!
        These products are really heavily regulated so they are up and up. IF they were not what they say they were the Insurance commissioners and SEC would penalize and remove the item from the insurance companies products…that’s why most VUL are gone….VARIBLE UNIVERSAL LIFE…in case you were unsure what the acronym ment.

        • Actually, selling life insurance without a license is illegal. Advice is a subjective term that varies among a lot of states. For example here in Vermont, I can sell insurance and earn commissions or I can charge for providing advice, but not both (there are two distinct licenses for that purpose).

          But going back to the last comment, there is no insurance advice taking place here. The purpose of this blog post is merely to highlight the questionable practice of calling life insurance a 7702 Plan. Categorizing the so-called “7702 Plan” with 401(k)’s, IRA’s, etc. is a questionable action in my eyes. That’s the point of this discussion. You might disagree; you are free to do that.

          The blog post made no mention of indexes paying or not paying anything so I’m not sure what you are trying to say with that comment.

          We also didn’t comment on the legitimacy of any product approved or not approved by any state insurance regulator. The SEC does not regulate fixed insurance contracts.

          Thank’s for clarifying what you meant by VUL.

    • 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.

  2. 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.

    • 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.

  3. 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.

      • 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.

        • Dean,

          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.

          • Hello Brandon! I applaud your efforts at warning people about deceptions in presentation, I too dislike deceivers and scammers. I’d like to address that most people don’t read comprehensively. Of those people there are 2 groups, one group that only sees THE 7702 PLAN IS A LIE! LOL and they get scared hence the comments and questions. The other group sees THE SAME, and they get angry because life insurance as a retirement tool is not a lie. My suggestion is you made TOO BIG of a deal about the presentation of IRC 7702 as a plan. It simply doesn’t matter whether someone calls it a plan or highlights the retirement feature of a life insurance policy as an investment tool because IT IS. seems to you made a HUGE fuss over nothing, created too many question that frankly were unnecessary.

  4. 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.


    • 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

    • 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.

      • 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!

    • 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.

  5. 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?

    • 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.

      • 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.

    • 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).

      • 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.

        • 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.

        • 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.

  6. 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.

    • 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.

  7. so you don’t sell life insurance? Do you have a License to discuss life insurance with your state?
    So can I ask why your an expert? Wouldn’t a tax free income stream be better than a taxable one in retirement?

    • Hi Lora,

      My holding an insurance license is immaterial to a discussion about calling life insurance a 7702 plan. But since you asked, yes I do hold an insurance license and have for over a decade. I’m not advising anyone on the purchase of life insurance in this case. Nor am I soliciting the sale of life insurance.

      As far as my being an expert, I’ll let our readership decide on that.

      Is a tax free income stream better than a taxable one? There are way too many other variables to consider before either you or I could answer that question intelligently.

  8. Hi Brandon,
    I can appreciate you trying to be neutral on the subject. Although you are not;)
    The title of this article is misleading. I thought you were going to give a clear answer as to whether or not they were good. You made a lot of valid points as to why its good and then contradicted yourself at the very end of the piece by telling your readers to “shake their heads at their foolishness” (in regards to the agent recommending the strategy). I feel like you are one of many Americans that get caught up in the delivery rather than the message. You seem to agree that this is 100% a life insurance policy with a separate account(cash value) within the policy and because of this it has certain benefits your traditional plans won’t have and vice versa. So I don’t understand the subtle undertones of negativity regarding the recommendation for someone to allocate funds to this plan vs a 401k. You also say 401ks aren’t plans either. I believe that’s also just marketing for corporations to get their employees to contribute money into said accounts (which corps get a tax break on). So if its wrong for insurance professional’s to referr to the life insurance retirement strategy as 7702 plans, is it wrong for corporations to call custodial accounts 401k retirement plans? I personally dont think so. They are both using tax codes to associate the benefits provided by the accounts to attain the goal of said accounts right? In this example retirement. In the end you say you disagree with calling life insurance a 7702 plan, I disagree for the simple fact that its exactly what you called it… marketing. What I will say is a bad thing is marketing and selling life insurance as a 7702 plan and then designing… lets say an IUL as you used, as a pure insurance product. That there is the issue that most “experts/insurance pros” have. But for some reason they focus on what we call it. If I say im giving you something that does a specific task, who cares what i call it as long as it does what I say. When it doesn’t do what I say is when you should be concerned. Too many “pros” making recommendations or giving advice without due diligence or individual review. I will say that there are many factors that make this a good thing or even a bad thing. But you will never know until you sit down with a reputable licensed insurance professional. One thing I can say for sure is that if there are several zeros in the initial years for the cash surrender value your policy is not designed for optimal cash value growth. And btw you said not to expect 11% from these policies. I can assure you ive seen 11-15% growth in Transamericas FFIUL for multiple accounts.

    • MrHex,

      In most if not all states, it is explicitly illegal to market life insurance as any other thing than life insurance. Calling it a 7702 Plan is in violation of that law.

      What you think is okay or not okay doesn’t much matter when there is law that says no. There is no law that prohibits the use of the term 401(k) plan.

  9. I was approached by a Midland National Rep about reducing my 401k contributions due to the fact that my account value is 220k and to start contributing to a Midland IUL at $500mth for 15yrs and then start taking income either 5yrs from then or 10yrs from then. I make too much money to qualify for a Roth so Im thinking this might be a good option. he showed me a rate of return of 6.23% It comes with a Critical care, along with a Chronic Care rider. What do you think?

    • Hi Anthony,

      I wouldn’t make any plans based on the 6.23% projection (I think it’s way too high for the Midland product at this time), but beyond that this is certainly an application for life insurance.

      The surrender charge for Midland will last 15 years, so you have to be really sure you want them as a company. The product is decent. Customer service at Midland leaves a lot to be desired (heads up).

      The accelerated death benefit rider is a good one for sure.

  10. found this in my search for more info
    I am self directed person looking to convert part of my IRA that will never be used into tax free legacy. The only thing that seems to do this is a 7702 type policy exist. Does this make sense to you? Have no plan [ or need] to ever draw from policy. Been shown illustration where $18k for 7 yrs yields YUGE tax free death benefit. Is it true that these only come from mutual insurance companies that pay dividends?

    • Hi Kevin,

      As long as you understand that you are liquidating a portion of your IRA and using the money to buy life insurance, then it’s potentially fine. There’s definitely a right and wrong way to approach it. If you want more a more in-depth discussion about this, feel free to reach out to us through the contact us page.

    • This depends on how the money is distributed. If surrendered to basis or using a loan the distribution does not have a tax consequence. But do know that if loans are used and those loans total a number higher than the premiums paid (i.e. the basis) then the contract must remain in force to the insured’s death. If the contract is surrendered under this scenario, the policy owner will have a taxable income in the amount of any outstanding loan balance in excess of premiums paid.

  11. Thanks for quick reply. What do you mean by “the contract must remain in force to the insured’s death”?
    My understanding is the accumulated value is so large than the total amount that it will never go underwater.
    Another question is – Do I need to return the loan that I will be taking every year?
    Thanks a lot for your help

    • If a loan is outstanding that is larger than the basis of the policy and the policy is surrendered, the policy owner will recognize the difference between loan balance and cost basis as ordinary income and owe taxes on it, in addition to any cash surrender value received.

      No you do not need to return the loan annually.


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