When you’re planning for your financial future, you’ll likely hear many different terms thrown around about different types of accounts and plans. One of the terms you might hear is a 7702 plan. 7702 plans are usually marketed as a way to save for retirement, and while they do have a savings component, they are actually a form of life insurance. In most cases, you actually shouldn’t set up a 7702 plan – you’ll be much more financially stable if you set up a more traditional retirement account and life insurance plan instead. Here’s what you need to know about 7702 plans before you set one up.
What is a 7702 plan?
‘7702’ refers to the IRS’s code for this type of insurance. A 7702 plan is a life insurance plan that can be used to build cash savings, and they are very similar to variable universal life insurance policies. Life insurance companies sell them, and you’ll pay premiums every month, which go towards your death benefit and the policy’s cash value. This cash value can then be invested, which helps it grow over time. The cash value grows tax-deferred, and you can withdraw it after the policy has been in place for a certain number of years. When you pass away, your beneficiaries will receive a death benefit as well as any of the cash value remaining. If you reach a point where you no longer need life insurance, you can cash out the entire policy and use it however you would like.
Why should I be wary of 7702 plans?
While you can use 7702 plans to your benefit, it’s important to be very careful when shopping for them. This is because they are often marketed as retirement plans by insurance companies desperate to make sales. While you can use 7702 plans to save money for your future, they are not as efficient as other, more traditional retirement plans. They are also usually more expensive than different types of life insurance. They typically come with hefty fees and high premiums that can mitigate any financial benefits that you might get from saving your money.
If you do decide to get a 7702 plan, you should do it for the life insurance benefits, not to save for retirement. Think of it as a life insurance policy that provides extensive coverage and also can help you save some extra money. These policies aren’t something that you should rely on for retirement savings. Although you will be investing some of your money, the returns don’t compare to investment accounts explicitly designed for retirement.
What are my alternatives to 7702 plans?
There are several alternatives to 7702 plans that you can use to get the results you are looking for. If you are interested in the life insurance aspect of a 7702 plan, there are many other options worth looking at. Term life insurance plans are typically the most affordable and accessible options for the average consumer. These are life insurance plans that you set up for a specific amount of time, usually anywhere between 10 to 35 years. Many people will get these plans with the intent to cover the mortgage or student loan debt or to support their children while they are growing up. Virtually every life insurance company offers these plans, often at low rates. There are even term life insurance plans that you can qualify for without a medical exam if you are in poor health. The only potential downside to these types of policies is that they don’t cover you for your entire life. However, you can opt to renew them when they run out if you still feel you need the coverage, albeit at a higher rate.
If you are interested in a retirement savings plan, you have many different options to choose from. First, you should check to see if your employer offers a 401K plan that you are eligible for. With a 401K plan, a small amount of money will be taken out of each paycheck and deposited into this savings account. You can then choose from a variety of different investment options to grow your wealth. If you contribute enough money to your retirement account, your employer will actually match your contributions up to a certain amount as well.
If you don’t have the option of setting up a 401K, you can look into IRAs or individual retirement accounts. These accounts are similar to a 401K in that you can invest the money that you contribute, and you get tax breaks on your contributions. With a traditional IRA, you can deduct your contributions from your taxes that same year. With a Roth IRA, you cannot take these tax deductions, but when you withdraw your funds in retirement, you won’t have to pay taxes on them. This is a reliable way to save for retirement, regardless of your financial situation.
A good post Thomas, but you incorrectly state the tax benefits of the 7702 approach, which is any gains from the cash-value portion of the policy are completely tax-FREE (not tax-deferred, like 401Ks or IRAs), and in fact not even reported in any manner to the government.
Given where we are from a U.S. deficit perspective and the likelihood of higher tax rates in the future, that’s an aspect of these plans that shouldn’t be over looked.