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Should I Set Up a 7702 Plan?

should I set up a 7702 plan
Insurance Quotes 2 Day Team

Written By Doug Mitchell

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University, a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA and Top of the Table member of the Million Dollar Round Table (MDRT). Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

Holly Mitchell  &

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Rob Pinner   &

Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

 8 minute read

If you think that your Social Security benefits will be sufficient for you to live on in retirement, think again. Regrettably, even if you are contributing to a 401(k) or IRA, you may feel a little safer, but have you considered how your tax liability will impact your retirement nest egg?

The matter gets even more frightful if you are a high-income earner who is generally hampered by the constraints the IRS has placed on traditional retirement plans. Certainly, tax-hungry legislators want you to save for retirement, but only as long as you are willing to give back some of your hard-earned money to Uncle Sam.

It’s time to think outside the box and consider alternative products if you plan on continuing your lifestyle during your retirement years. It’s time to consider an alternative to your Daddy’s retirement plan.

What is an IRS 7702 Plan?

A 7702 Plan is a marketing term that insurance companies and advisors use to market insurance policies that are primarily used to accumulate wealth that you can access on a tax-free basis. It’s likely that life insurance marketing managers prefer terms like 7702, 702(j), or LIRP so the product being offered does not appear at first look to be a life insurance product.

IRS Code 7702 specifies what the IRS considers to be a legal and legitimate life insurance contract and defines how life insurance contracts will be taxed. IRS Code 7702 only applies to insurance contracts issued after 1985. Many financial professionals refer to this as the IRS 7702 clause.

Under this section in the IRC, life insurance contracts must pass at least one of the following tests:

  • Cash Accumulation Test – In simple terms this means that the cash value in the policy cannot exceed the single premium that would have been charged to pay the policy in full.
  • Guideline Premium and Corridor Test – This means that a policyholder cannot pay more into the policy than would be required to fund its insurance benefits.

Background of IRC Code 7702

Section 7702 of the U.S Internal Revenue Service lays down the requirements that must be fulfilled for an insurance contract to be treated as   on a contract and the amount of cash that can accumulate relative to the death benefit. The limits use actuarial calculations to determine the present value of future death benefits using the greatest of 6% or the guaranteed interest rate for guideline single premium and the higher of 4% or the guaranteed interest rate for guideline level and Modified Endowment Contracts. (flag this for plagiarism)

Policies must pass one of the cash-value accumulation tests (CVAT) and guideline premium tests (GPT) so that the cash value build-up will not be taxable. Under Section 7702A, a policy must pass through the 7-pay test so that it is not recognized as a Modified Endowment Contract. Under this test, a life policy cannot receive premiums more than the total premiums necessary to pay up a life policy within seven years.

The IRS code remains important since it dictates which types of cash value life insurance policies are eligible to receive tax advantages. If a life insurance policy does not meet the criteria listed in this section, then the growth of the cash value of the policy is taxable income to the beneficiary.

If at any time at least one of these tests cannot be passed, any income paid on the cash value in the policy will become taxable for that year.

Impact of the Change on IUL

In December 2020, Congress voted to pass the Consolidated Appropriations Act of 2021, which included further revisions to Section 7702. For life insurance contracts issued after 2021, the insurance interest rate will be predetermined only in an adjustment year, which will allow bigger front-loaded premiums for the same amount of IUL death benefits. Effective January 1, 2021, the insurance interest rate is defined as 2% and may now be used to calculate adherences for 2021. From 2022, the market-based rate calculation took effect; however, the insurance interest rate remained at 2%.

The new provision will help permanent life policies to continue being characterized as tax-advantaged life insurance contracts and avoid being classified as other investments whose benefits  are considered taxable income. Even though the newer post-7702 IUL policies will accommodate more premiums, the guaranteed lifetime growth of these new policies will be compressed. As a result, more of the cash value growth will thus be tied to the determined index, and less of the total growth will be derived from the company’s guaranteed cash value trajectory within the contract.

Under the new provision, lower interest rates will slash all future IUL policies guaranteed cash value growth rate from 4% to a low of 2%. Implementing lower interest rates in the various calculations under sections 7702 and 7702A will result in increased funding limits for life insurance contracts. Premium limits calculated under the GPT and the 7-pay test have now increased. The changes to these limits are pretty substantial versus the prior limits. Similarly, using a lower interest rate to calculate the single net premium for the CVAT should produce higher cash values

What type of Life Insurance Is Used for a 7702 Retirement Plan?

Any type of life insurance that will accumulate cash value can be used for a 7702 retirement plan. Certainly, some are much better than others, and for the purpose of this article, we will focus entirely on Indexed Universal Life (IUL) because when it’s set up properly, the IUL delivers asset accumulation while safeguarding against any losses.

If you want to know how popular using indexed universal life insurance for retirement planning is, just ask any CEO of a fortune 500 company because 85% of them use an IUL as part of their retirement strategy.

Where traditional retirement products fail, the indexed universal life insurance in your 7702, 702(j), or LIRP succeeds. Also, please note that there is not an insurance product labeled 7702 life insurance since any cash-value life insurance product can be used to fund your 7702 retirement plan.


Market VolatilityProtectedExposed
Contribution LimitsNoYes
Annual Income LimitsNoYes
Early Withdrawal PenaltyNoYes
Tax-Fee DistributionsYesNo


Why Should I Use Indexed Universal Life?

A 7702, 702(j), or LIRP can be an advantage for every person who wishes to accumulate wealth for retirement. It is especially useful for high-income earners who will likely max out traditional investment products or earn too much income to even participate.

As we mentioned earlier, we believe Indexed Universal Life Insurance is the best life insurance product for accumulating wealth and would be the best solution for your 7702 life insurance.

To determine whether Indexed Universal Life insurance makes sense for you, we recommend that you review the 7702 plan pros and cons of LIRP’s in order to make an informed decision.

7702 Plan Pros and Cons

 Advantages of Using Indexed Universal Life for Retirement Planning 
No Contribution Limits
Unlike the IRA or Roth IRA which have contribution limits of $6,000 annually or $7,000 if you are age 50 or older, there are no limits placed by the IRS on Indexed Universal Life Insurance.
No Early Withdrawal Penalties
With traditional retirement plans like the 401(k) or IRA, there are substantial penalties if you withdraw money prior to age 59 1/2. There are no early withdrawal fees or penalties with Indexed Universal Life insurance.
No Required Minimum Distributions
The IRS requires all employees who have contributed to employer-sponsored retirement plans to begin taking required minimum distributions during the year you turn 70 ½ and every year thereafter before Dec 31st of the year. There is no RMD requirement for Indexed Universal Life policyholders.
No Distribution Tax Liability
Distributions from employer-sponsored retirement plans and individual IRAs are taxable which means a large share of your retirement fund will be taken by the IRS, however, distributions from your Indexed Universal Life insurance are taken as loans and therefore not considered income by the IRS.
Guaranteed Tax-Free Death Benefit
Since an IUL is a life insurance product, the policy provides a guaranteed death benefit that is paid to your beneficiary free of any tax liability.
 Disadvantages of using Indexed Universal Life (IUL) for Retirement Planning 

Certainly, with any investment or insurance product, there are disadvantages to consider and compare with the advantages. Disadvantages are typically based on your circumstances rather than a defect in the product.

Earnings Cap
The insurance company will have an earnings “cap” that states the maximum amount of interest they will pay at the end of each reporting period. This cap will have an impact on the interest that you can earn when market returns are unusually high. The cap is offset, however, by the “floor” in the policy which states the minimum amount of interest that can be earned at the end of a reporting period. For example, if your “floor” is 0% and the market loses 8%, your account will not be affected by the losses in the market.
Mortality Charges
There are certain expenses like mortality and insurance expenses associated with your IUL that will increase as you get older. These expenses are based on the death benefit in the policy. When your policy is set up correctly by using the lowest death benefit possible, these expenses can be minimized.
Surrender Charge
Most IULs frontload their sales fees by spreading them over the first 10 to 15 years. If you decide to cancel your policy early, these fees will be deducted from the refund of your cash value. This is known as a surrender charge.

In Conclusion

If you are considering an alternative investment product because you are unsatisfied with the retirement products you are currently using or you are concerned about your tax-liability during your retirement years, a 7702 retirement plan using an Indexed Universal Life policy may be the alternative that will best meet your needs.

To get the necessary information about indexed universal life insurance, you can complete the quote form on this page or call us at 1-800-712-8519.


Frequently Asked Questions

Why would I consider an IRS 7702 plan?

7702 plan image

You can use a 7702 plan to accumulate wealth over time that can be used as a supplemental stream of income during retirement. You can, however, take money from your plan via policy loans without any tax consequences.

What is a 7702 Plan?

Life insurance at 38

A 7702 Plan is a marketing term that insurance companies and advisors use to market insurance policies that are primarily used to accumulate wealth that you can access on a tax-free basis. It’s likely that life insurance marketing managers prefer terms like 7702, 702(j), or LIRP so the product being offered does not appear at first look to be a life insurance product.

What kind of life insurance works best in a 7702 plan?

what is a 7702 plan

Any type of life insurance that will accumulate cash value can be used for a 7702 plan. If your concern is about earnings, tax-free withdrawals, value protection, and a guaranteed death benefit, Indexed Universal Life will be the better solution.

Does the govenment regulate a 7702 plan like they do with an IRA?

Since your 7702 is funded using life insurance, the constraints that are placed on an IRA are not present and the tax liability typically doesn’t apply.

Is the 7702 plan Suze Orman or Dave Ramsey approved?



author avatar
Doug Mitchell, CLU Independant Advisor
Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA. Doug has spent almost 30 years in the life insurance industry and has also held licenses to sell securities, long-term care insurance and home and auto insurance. Doug is a Top of the Table Million Dollar Round Table member (MDRT).  MDRT is a global, independent association of the world's leading life insurance advisors.  For two years, Doug served as President of the Auburn Opelika Association of Financial Advisors and has been a member of the Million Dollar Round Table. He obtained Life Millionaire status at Horace Mann Insurance Company and was awarded the Life Agent of the Year Award. Later in his career with New York Life he was an Executive Council Member. Doug currently serves as President of Ogletree Financial, a managing general agency serving life insurance agents and clients in all parts of the United States. Today, Doug’s main focus is servicing 1000s of policyholders and growing the agency through the reach of