7702 plan for retirement?

[terrible one]

Does anyone have one or use one? I’ve never heard of them but was approached by a life insurance salesman recommending one for retirement.
I have a pension and contribute to a Roth IRA but wouldn’t mind diversifying more for retirement. However, this plan seems like one of those too good to be true things with no taxes, always positive gains, etc.
looking for more info if anyone has any.

Thanks

 

[JPD5801]

Does anyone have one or use one? I’ve never heard of them but was approached by a life insurance salesman recommending one for retirement.
I have a pension and contribute to a Roth IRA but wouldn’t mind diversifying more for retirement. However, this plan seems like one of those too good to be true things with no taxes, always positive gains, etc.
looking for more info if anyone has any.

Thanks

https://blog.wealthfront.com/7702-retirement-plan/

 

[Ohio Snake]

Yes, Im very familiar with the 7702 plan. First off, it is not really a retirement plan...... its life insurance. The name 7702 comes from an IRS code.

Most people buy life insurance to protect their loved ones from the impact of a death. In this common scenario, the buyer wants the lowest premium for the policy type and riders ( if any) on the contract.

A 7702 plan, also sold as a Non-MEC Premium Life Insurance Plan is different. The policy type typically used is a Variable Life ( VUL) or Indexed Universal Life Insurance ( IUL) contract. You actually will over-fund a contract with premiums as long the premiums do not exceed the Modified Endowment Contract (MEC) limits as established by the IRS. Another words, the policy MINIMUM death benefit relevant to the premium may be used as long as it does not violate IRS guidelines.

The policy is designed around this allowing lots of cash to go in to the policy with the minimal amount of insurance cost. Typically, the death benefit includes the face amount PLUS the cash value in the design. Important riders can be added, if desired.

The GOOD:
Tax deferred growth, tax-free income potential, tax -free death benefit to your loved ones, chronic illness protection via rider ( if wanted), unlimited cash growth ( or loss) if using a VUL, safe capped cash growth ( no market loss potential) if using an IUL.

The BAD:
Must be in good health to keep cost of insurance low, younger the age....the better the cost of insurance, complex way to buy life insurance.

Who should consider using it:
1.) You must believe in the benefits of life insurance.
2.) You may be funding a Roth IRA to the limit, but want more tax-free income potential than what the Roth IRA can do.
3.) You may not qualify for a Roth IRA and your 401k does not offer a Roth option for tax free income.
4.) You may want tax-free access to the cash prior to age 59.5.
5.) Your willing to make a long term commitment to funding based on what you can comfortably afford.

Hope this helps and makes some sense for a complex product. I tried to keep it short and left technical info out.



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[Ohio Snake]

https://blog.wealthfront.com/7702-retirement-plan/

The article does point out a true fact. The life insurance does have the potential to pay a large commission to the agent based on “how much death benefit” is purchased....hence the dreaded “surrender charge”. And yes, the carrier makes a profit as well.

This policy type can be good for certain people, however most will not understand the complexity of it.

Slightly edit for more detail on compensation.

******* Policies like this have a “target premium” that is hidden in the illustration. The target premium can be the same ( or higher ) than the annual premium. In the case of the 7702 plan, the target should be way less. The target premium can typically be utilized for compensation calculations. As an example, The total annual premium for a 7702 plan policy maybe $15,000 per year on a $500K death benefit. The target premium may be $5K. Carriers may pay the agent compensation of 50% to 100%+ of the target premium in the first year only. THIS IS JUST AN EXAMPLE AS CARRIERS PAY DIFFERENTLY. Obviously, the higher the death benefit, the older the person may lead to a very high pay check for the agent.*******


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[terrible one]

So do you guys actually use it?

 

[Ohio Snake]

So do you guys actually use it?

I have one designed under a second-to-die VUL platform....( been funding for 18 years). I sold it to myself.

I have sold a few to other clients for various reasons.

Most people have access to a Roth IRA or Roth 401k for tax free investing for retirement. In addition, most companies people work for offer benefits such as group term life and you can obtain a 401k as well. Of course you can buy your own term insurance, if needed. The offerings of roth ira/401k and group/ individual term can possibly eliminate the need to do a 7702 plan.

Again, only certain people may find this attractive. If this program interest you and you see a need for one, be sure the policy is designed properly, you understand it fully, you and/or your spouse are healthy and its a long commitment for funding properly.

As a side note to keep in mind: Life insurance is the only product that offers a tax-free death benefit, a tax-free cash withdraw provision, a loan provision to access gains tax-free and is considered as a FIFO ( First In First Out) product for tax efficiency. The IRS cant do sh** about it.

 

[Ohio Snake]

Quick question......

How long have you known the insurance agent that approached you?
If the answer is a long time and he knows your full financial situation, decide if the program is right for you and work with them.

If you just met, I would really question the motivation behind the suggestion for the plan and get a second opinion.


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