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The 702(j) Retirement Plan Explained

702(j) retirement 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.

 5 minute read

Are you looking for an alternative to traditional retirement products? Have you found that when you look at the big picture, your IRA, 401(k), Roth IRA, or other retirement plans are not going to cut it when it comes time to begin taxable withdrawals?

What about the IRS constraints that you have to deal with? Are you concerned that you have a contribution limit, unable to withdraw before 59 ½ unless you pay taxes and a penalty? And what about required minimum distributions (RMDs), do they even make sense to you?

If these plan challenges concern you and you believe they will impact the lifestyle you are planning for, it may be a good time to start thinking “outside the box.” One product that a lot of hard-working Americans have begun to capitalize on is the 702(j) and in this article, we’ll do our best to explain it for those of you that are taking a fresh look at your retirement planning options.

The 702(j) Plan Explained

First and foremost, it’s important that consumers understand that the 702(j) is not like a 401(k) or IRA type of retirement product, it is an insurance policy that combines a guaranteed death benefit with a cash account that earns interest.

In fact, the designation 702(j) is not in the tax code. Instead, it is Section 7702 of the tax code that establishes the rules for life insurance products. Why a “7” was dropped and a “(j)” added appears to be for marketing appearances to make it sound like a retirement product rather than a life insurance policy. But, whatever you call it, a properly setup 702(j) can accumulate wealth just like a traditional retirement, but in most cases, it will work better by earning higher interest, no exposure to losses, and providing a tax free income stream. Here’s how it works when you use Indexed Universal Life insurance for your 702(j) retirement plan:

You purchase an indexed universal life insurance policy (IUL) with the primary purpose of creating wealth and the secondary purpose of purchasing life insurance. Your premium payments (contributions) are going to be more than the cost of insurance and related fees. The portion of your premium that is not for life insurance is kept in a cash value account and then invested in one or more market indices (not directly in the market) and earns interest based on the performance of each index account.

Your account will have a “Cap” which varies by insurance company that will limit the amount of interest your account will earn, but it will also have a “floor” that determines the minimum amount of interest you will earn. The good news is that your “floor” will never be less than zero which means you cannot lose money during the times of unfavorable market performance. Here’s a simple graphic that indicates how your cash value can grow over time:


702(j) retirement plan graphic


Just like other investment or insurance products, the account owner will discover advantages and some disadvantages when they choose the 702(j) as part of their retirement planning portfolio.

The Benefits of a 702(j) Plan

How your 702(j) will benefit you depends on the challenges you are attempting to overcome with your traditional retirement products. Typically the complaints from most individuals trying to accumulate the wealth needed for the retirement lifestyle they are shooting for are eliminated when you deploy a 702(j) built with indexed universal life insurance.

  • Your wealth is accumulated on a tax-deferred basis
  • You can withdraw cash anytime without being subject to taxes and penalties
  • No annual cap on premium payments (contributions)
  • Provides a tax-free death benefit to your beneficiary
  • No minimum distribution requirement at 72
  • Retirement income (taken as loans against the cash value) is not taxable
  • Since the insurance policy will have a floor rate that is not less than zero, the policy’s cash account will not lose money as a result of a down market.
  • The 702(j) allows you to invest in the market without actually being in the market


The Disadvantages of a 702(j) Plan

As was mentioned earlier, the advantages and disadvantages of a 702(j) plan will depend on the individual’s circumstances and retirement goals.

  • Your 702(j) plan is built using indexed universal life insurance that has upfront charges that consist of sales costs and monthly expense fees that will impact the growth of your cash account to a certain extent.
  • There is no employer match like you get with a 401(k) plan.
  • There are policy surrender fees if you cancel or surrender your policy early, usually 10 years
  • Premiums are not tax deductible like traditional 401(k) or IRA contributions
  • Loans will be deducted from the death benefit when you die.
  • Overfunded life insurance could result in your policy becoming a modified endowment contract and subject to a tax liability for all outstanding loans if not set up properly.

Are 702(j) Plans Considered Scams?

A 702(j) plan is also known by other names, depending on who you talk to such as a 770 account, a 7702 (actual U.S. Code), or a LIRP since all of these reference wealth accumulation using life insurance. The “scam” term typically pops up when insurance or financial professionals do not disclose the true nature of the product. A 702(j), 770 account, 7702, and a LIRP are all legitimate life insurance products that have tremendous value and shouldn’t be described as traditional retirement plans.

The 702(j) is not in the same IRS category as an IRA or 401(k) and is best suited for high-net-worth individuals who have maxed out traditional retirement products and want to accumulate wealth tax-free so that the retirement lifestyle they are investing for can be realized.


Bottom Line

Individuals and families who are high-earners will typically experience challenges with traditional retirement plans because of IRS rules and regulations. Most of the time these challenges are a result of annual contribution limits, early withdrawal penalties, taxable withdrawals, and distribution requirements.

The 702(j), 770 or 7702 account, and LIRP are considered alternative methods for accumulating wealth for retirement, and in many cases, these plans are the perfect solution for the challenges found in traditional retirement plans.


We are Here for Your Needs
For more information about the 702(j) plan and Indexed Universal Life Insurance and how it may be a good fit for your retirement planning, call us at 1-800-712-8519.


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