A 7702 is a life insurance policy used to save part of your income for retirement.
The money you contribute is after-tax.
7702s can provide tax-free income in retirement.
The insurance company handles the management of your money based on your choices, and the distribution of income to you during retirement.
Are you one of the many confounded or worried about saving for retirement?
Perhaps you work for one of the 86% of employers estimated by the U.S. Census that do not offer retirement plans. Or you joined the swelling ranks of independent professionals who no longer get benefits. Maybe uncertainty about the market and worry keep you from contributing to your 401(k). Or you make great money and are frustrated with the IRS imposed limits on 401(k)s and IRAs that prevent you from saving as much as you want.
The 7702 retirement plan helps with all of these situations. Yet, you are probably unfamiliar with this plan because it has not been promoted heavily like IRAs and 401(k)s nor offered by the average employer.
The largest corporations in the country have used life insurance for decades to give elite executives a huge tax-free retirement income. Why? Because the tax advantages found in subsection 7702 of the tax code are extraordinary.
And that’s how the 7702 gets its name - from the subsection of the IRS code that defines it, just like a 401(k).
What is a 7702?
It's a life insurance policy used to save part of your income for retirement. The money you contribute is after-tax. A 7702 plan may provide tax-free income in retirement. You can set this up on your own or through your employer if offered. Different kinds of policies let you design a plan that matches your tolerance for risk.
For example, some people want to invest in the stock market while others never do. Specific 7702 policies let you invest in the market while others do not. The insurance company handles the management of your money based on the type of policy you choose and the direction you provide. It also manages the distribution of income to you.
Is a 7702 plan a Formal Retirement Plan?
A 7702 is not a formal retirement plan, but still a powerful way to save for retirement with excellent tax advantages.
The tax code defines retirement plans, and life insurance is not one. Instead, an entirely separate section of the tax code, Section 7702, describes life insurance.
Life insurance is a contract between you and the insurance company with significant tax benefits (26 US Code § 7702 - Life insurance contract defined | US Code).
Why call it a plan?
People commonly refer to any method used to save money for retirement as a "retirement plan." That's the way we think and speak. Ask people how they save for retirement, and they may talk about investing in real estate, their business, an IRA, or a 401(k).
Small business owners almost always call their business their "retirement plan." Often people who invest in rental income property refer to these properties as their retirement plan. But neither is a "formal" retirement plan as defined in the tax code and certainly no more so than a life insurance policy used to generate retirement income.
VestCred refers to life insurance used by people to save for retirement as a 7702 plan because that's how people think and speak. It makes sense to people
Who Would Benefit from A 7702 Plan?
Almost anyone. Are you confused or worried about saving for retirement?
Do you work for one of the 86% of employers that offer no retirement plan?
Or, maybe you've joined the swelling ranks of professionals who work as independent contractors and no longer have benefits.
Or, you participate in a 401(k) but worry about the market, unsure what to do.
Or, you make great money but are frustrated with IRS-imposed limits on IRAs and 401(k)s that prevent you from saving as much as you want.
A 7702 plan can help many individuals in each of these situations.
It hasn't been promoted heavily like IRAs and 401(k)s, and it's typically not offered by the average employer, so it's unfamiliar to most people.
Yet, this tool has been a staple for retirement planning in corporate America for a long time.
Corporations Have Used Life Insurance in Retirement Plans for Decades
The largest corporations (Fortune 500 companies) have used life insurance to give elite executives tax-free retirement income in the form of Nonqualified Deferred Compensation.
AccountingToday.com reported in 2016 that 92% of Fortune 500 companies offered deferred compensation plans, and 83% of supplemental executive retirement plans used life insurance .
These plans get little fanfare, and the general public is virtually unaware of their existence. How unfortunate, because the tax code allows individuals to create a Private Non-qualified Deferred Compensation Plan for themselves, a spouse, a child, or even grandchildren. Such plans can fit most budgets and help people achieve their retirement goals.
Most people don't make as much as high-flying CEOs, but the benefits are proportional
A 7702 Plan is an insurance policy used to set aside part of your income for retirement. As with any life insurance policy, it has a death benefit. The death benefit plays an important role. If you pass before retirement, the death benefit will protect your family and make up for lost years of earning.
The money you contribute, called the premium, is part of your taxable income each year, like contributions to a Roth IRA and Roth 401(k). When the money you contribute grows, the growth is not taxed. And when you take cash out, you can do so tax-free.
You can withdraw all of the money that you contribute over the years tax-free. Or you can borrow money from the policy over your lifetime and, generally, pay no income tax on the loans.
Most people use loans to access money in their 7702 plan. That way, 100% of the money stays invested and working for you!
Do you have to pay back the loan? Yes, but not out-of-pocket. When you don't pay the loan back out-of-pocket, the loan balance grows over time. The death benefit also increases over time, by design, keeping pace with the growing loan balance. The loan gets repaid in one payment at the death of the insured using a portion of the increased death benefit.
Do you have to pay the loan interest out of pocket? Generally, no. Most plan designs also repay the loan interest in a lump-sum at death with a portion of the increased death benefit. If you choose to pay any part of the loan interest during your lifetime, you repay yourself.
Does this mean you lend yourself money? Yes. With 7702 plans, you become your lender. And guess what? You'll never turn yourself down. Borrow for any reason with no origination fee, points, or any other kind of charge. We recommend a policy that lets you choose a fixed or variable interest rate. Become your own banker!
Are these loans tax-free? Yes, unless the policy lapses or the loan defaults. These are personal loans. And personal loans do NOT count as taxable income and do NOT get reported on a tax return unless you default on the loan. Canceled debt is taxed as ordinary income.
How much can you contribute annually? 7702 plans have no contribution limits. You may save as much as you can afford, unlike traditional retirement plans like IRAs and 401(k)s.
Uncapped contributions are particularly significant if you're behind in saving for retirement or want to contribute more than the limits placed on traditional plans by the IRS.
One caveat. The IRS has established a ceiling for premium contributions based on the death benefit amount. We must calculate the appropriate death benefit amount that permits contributions in the amount you want to save annually.
What is the Death Benefit Amount? It varies based on age, gender, health, and premium contribution, just like any life insurance policy. Every dollar contributed goes toward three components: administration, the death benefit (mortality cost), and cash accumulation.
You want a low death benefit to minimize the amount of each contribution spent on the mortality cost because this maximizes the portion allocated to building cash.
Minimizing the death benefit may seem counterintuitive because we typically want the highest death benefit possible for the least cost. Not so with a 7702 plan.
What Is the Role Of The Insurance Company? The insurance company acts as the "administrator" as they do with any insurance policy. It makes sure your money gets invested as you direct, provides annual statements, and permits monitoring of your policy online.
Are There Different Types of Policies for a 7702 Plan?
There are several different kinds of insurance policies suitable for saving for retirement. Some allow investing in the market, offering a chance for higher growth rates associated with stocks and mutual funds.
Variable Universal Life (VUL) lets you invest directly in the market through mutual funds. The value of a policy fluctuates up and down with the market depending on the investment choices made.
These policies offer choices in mutual funds, just like the selections available in IRAs and 401(k)s, with the same rates of return (up or down) that you would see in those traditional retirement plans.
If you invest 100% in stock mutual funds, when the market loses value, you would expect your policy to fall just as much. https://en.wikipedia.org/wiki/Variable_universal_life_insurance
Index Universal Life (IUL) ties performance to an index fund that you select, like the S&P 500 Index. IUL policies usually have a floor of 0%, which means when the market loses value, your policy would not; it would have a 0% return instead of a negative one.
In exchange for eliminating market loss, many IUL policies have a ceiling on the upside, meaning they may not get credited with all of the gains when the market goes up. However, by eliminating market loss, a policy may perform just as well or better without capturing all of the market's gain.
How does the IUL eliminate market loss yet maintain upside gain? The policy does not invest directly in the market. Instead, the insurance company uses options contracts to capture increases in the index that you select.
Other Types of Policies offer more conservative growth based on dividends or earned interest. These policies act more like long-term bonds (Whole Life) or Certificates of Deposits (Universal Life). Like IUL policies, these policies will not lose value when the market loses value. They're not in the market. But, overall, they have lower expected growth potential than IUL policies.
How Do 7702 Benefits Compare With IRAs And 401(K)s?
Everyone has limited dollars to save for retirement, so getting it right matters. The 7702 (cash value life insurance) differs greatly from a 401(k), and both of these differ quite a bit from an IRA. However, different does not mean “better than” or “worse than.” Each tool can help you.
The trick? Determining which one or combination of them best fits your needs. And the right combination for you may be the wrong combination for someone else.
First, some basics.
A Traditional IRA and 401(k) allow you to contribute money BEFORE taxes. You get a tax deduction today that reduces your current taxable income, and when you get to retirement, every dollar gets taxed when withdrawn as if it were salary or wages.
A Roth IRA and 401(k) allow you to contribute money AFTER taxes. No tax deduction today, but when you get to retirement, every dollar gets withdrawn tax-free.
The 7702 Plan works similar to a Roth. You contribute money AFTER taxes. No tax current deduction. But when you get to retirement, you can have tax-free income.
Do I Pay Tax On The Growth While I’m Working?
Traditional 401(k) No
Traditional IRA No
Roth 401(k) No
Roth IRA No
Do I Get A Tax Deduction?
The IRS imposes limitations on how much you can deduct and these may change annually.
Traditional 401(k) Yes
Traditional IRA Yes
Roth 401(k) No
Roth IRA No
Are There Penalties?
7702 Yes - surrender charges declining to $0 (usually in 10 years) if canceled
Traditional 401(k) Yes - 10% of any withdrawals made before 59.5
Traditional IRA Yes - 10% of any withdrawals made before 59.5
Roth 401(k) Yes - 10% of any withdrawals of growth before 59.5
Roth IRA Yes - 10% of any withdrawals of growth before 59.5
Is This FDIC Insured?
Deposits at banks are insured against loss up to $250,000. This includes IRA and 401(k) deposits at banks placed in CDs and Money Market accounts but does NOT include investment accounts at banks or other institutions like mutual fund companies. Most 401(k) money is NOT insured. FDIC does not insure life insurance policies. But insurance companies back each other’s policies
Traditional 401(k) No mostly (limited to accounts at banks)
Traditional IRA Limited to non-investment accounts at banks
Roth 401(k) No mostly (limited to non-investment accounts at banks)
Roth IRA Limited to non-investment accounts at banks
What Is The VestCred 7702 Retirement Plan?
The VestCred 7702 Retirement Plan is a retirement savings strategy that uses a specific type of life insurance policy to save for retirement called Index Universal Life Insurance.
What Are The Benefits Of A VestCred 7702 Plan?
Avoid losses when the stock market falls. Peace of mind.
Tax-free growth and Tax-Free retirement income.
Access money anytime for any reason without penalties by policy loan. It's your money.
No contribution limits.
The retirement income projected from a VestCred 7702 Plan may be much larger than the income you would get from an IRA, 401(k), or similar employer-sponsored plan, or even from a VUL life insurance policy.
You can do this for yourself. It's simple and easy.
How Do You Start Your Own 7702 Plan?
Why start a 7702 Plan?
To give yourself a Fortune 500 executive retirement plan.
To protect against market loss and maximize your after-tax retirement income.
Will any life insurance policy give you these benefits? No. Not every policy has these benefits and even those that do need the right design to maximize retirement income.
If you or a spouse qualify for life insurance, you can do this.
Videochat with us to ask questions and learn. Get personalized projections and revisions.
Once you like the projections, complete a medical history questionnaire.
Electronically sign an application to begin underwriting. (Make no contribution or payment until after you accept a final offer from the insurance company that we will present to you later).
Complete a 30-minute phone interview with an underwriter from the insurance company confirming your medical history. If healthy, that’s it. Otherwise, the insurance company may request your medical records directly from your doctor and even pay for you to get updated labs.
Receive, review, and accept a final offer from the insurance company that we will present to you.
Authorize an electronic payment.