We recently received the following email from a fellow reader about the 7702 Plan post:
Why so much hate for 7702 Plans? I've been following your blog for a few months now, and for the most part I love what you do. However I think your recent post about 7702 Plans was unfair. For starters, the plan is nothing like a 401k or IRA. Those plans can and HAVE declined in value. The 7702 Plan was created by Federal Tax Code and has served a lot of people very well. I was surprised to see someone like you attack a solid plan like 7702's.
I either wasn't clear, or someone didn't read carefully before hitting the contact us link. I never said the idea of using cash value life insurance as a savings plan was a bad one. I've written numerous articles on the subject which can be found on this site. We even have a section for it: Cash Value Life Insurance as an Asset Class.
I did not say that the use of cash value life insurance as an asset to include in one's portfolio is a bad idea. I simply said that the “sales practice” of calling it a 7702 Plan was a bad idea. I'll go a step further and go on the record as stating that telling someone that you are setting them up with a “7702 Plan” is a sign of questionable ethics and likely indicative of a lack of understanding (they say there are only two reasons you do/don't do certain things, you either don't know or don't care).
I was tame on the last post, but I'll go further here and bring up NAIC Model Regulation. The regulation specifically prohibits the practice of presenting a life insurance contracts as anything but a life insurance contract. So, the sale of life insurance as a 7702 Plan is, most likely, a violation of the Model Regulation.
Now to address the the people who want to play the it's the same thing as a 401k plan because it's just a reference to a piece of legislation card. A 401k plan is a set of requirements needed to place financial products into an “account.” IRC 7702 outlines the implications of life insurance contracts, a specific financial product.
I can put a wide variety of financial products into a 401k plan (including life insurance). That's because the legislation that created 401k plans was focused on the establishment of a plan whereas IRC 7702 merely worries about the tax implications of life insurance contracts and sets forth a few requirements that must be met in order for cash value contracts to qualify as life insurance (I'm being intentionally redundant).
I've hinted at this before. The notion that you have to “sell” your prospects is walking down the line of thinking that gets this industry into trouble. We've had plenty of creative individuals who are now no longer allowed to practice and left the industry with a black eye. We don't have to hide behind the vale of making insurance out to be something that it is not, and it's way better (in my opinion) to have an educated consumer who understands personal finance and realizes the benefits of owning cash value life insurance. He or she may not understand everything, but hiding it behind a 7702 plan is simply wrong.
In other words, trying to trick someone into buying insurance as the super secret investment plan the guys on TV aren't going to tell you about like you are some Satan's spawn of Kevin Trudeau is a sign of weakness and screams volumes about your ethics. I've mentioned several times I think the Bank on Yourself/Infinite Banking people teeter on violating this rule as well. That's why I've always said, I like that they highlight what you can do, but I'm not about to jump on their bandwagon and start designing “Infinite Banking” policies.
I'm going to stick with significantly over funded life insurance. It doesn't sound as sexy, but my stomach doesn't turn when I say it.
For those of us who really understand cash value life insurance and it's benefits (beyond the tag 'em and bag 'em types working to please their sales manager and make leaders council or whatever their career company calls it), there's some highly useful aspects to cash value life insurance–I'm not making any new day proclamations here. But mix a little (or a lot) of ignorance on the behalf of an agent with the shear lack of knowledge on the behalf of the consumer and you have a true recipe for disaster.
Just like consumers, agents rarely read and fully comprehend the particulars of the concepts behind 7702 plans, Infinite Banking, Bank On Yourself, LEAP, etc. Instead they focus on the part they like the most, the sale which means money in their pockets.
When done correctly, there is nothing wrong with the use of cash value life insurance as an asset. When positioned that way, but then sold purely on a death benefit basis (lots of base whole life or UL target premium) it typically ends in disaster.
For those of us who have worked in the Executive Compensation world, we know that companies typically have specialized products that are designed to build cash value faster and more favorably. These products pay lower first year commissions and they have longer charge back schedules. Some companies choose instead to create products with the flexibility to go both ways.
In either event, the same plain vanilla whole life policy that John and Jane Joe purchase merely to have $500,000 in permanent death benefit coverage where life insurance is first and foremost the important factor and cash value is just a nice addition is not the policy (or the design of policy) that even sort of resembles what I'm talking about when it comes to cash value life insurance as an asset class. If you want some idea check out this post on blending to get an introduction to the concept.
This notion, is a common overlooked misstep a lot of agents make in their attempts to apply the concept of a 7702 plans sales tactic to the simple sale of a life insurance policy. Even worse, there are still agents out there trying to make sales with Variable Universal Life policies that are very poorly manufactured for this purpose. This isn't to say that VUL is a product everyone should avoid all of the time, just most of the time.
I've been asked if I could reasonably accept the practice of calling it a 7702 plan if it were designed like an executive compensation plan. The answer is no. There simply is no such thing as a 7702 plan. Executive compensation planning requires legal documents (promises) that are then funded with cash value life insurance products. Big difference; an actual plan exists.
It's intellectually dishonest to call it such. Sales tactics like this don't work. These products are started with the intention of having them for a long time. Unlike vacuum cleaners, aluminum siding, and automobiles once the ink is dry, the client still has opportunity to back out. As an agent/broker, you're a fool to try and strong arm a sale this way.
If you choose to market this plan, you do so at your own probable peril.
Again I say, if you are a consumer (non agent) and have been approached by someone suggesting you set up a 7702 plan, run don't walk, away as fast as your legs will move you.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.
009 Why Are 7702 Plans So Private?
TEFRA DEFRA TAMRA: How Taxes Effect Life Insurance
Whole Life Insurance has a Strong Risk Adjusted Return – Historical Evidence
Myth: Indexed Universal Life Insurance has Stock Market Exposure – Case Study