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Understanding section 7702 plans

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A 7702 plan is a tax-advantaged life insurance policy and is named based on the Internal Revenue Code that spells out how cash value life insurance policies retain their tax-advantaged status. Contrary to its name, a 7702 plan is not a type of life insurance policy, such as term or whole life.

When you sign a life insurance contract, it is critical to understand the type of policy you select and how your premiums will be handled. This includes any potential tax advantages from the cash accumulation in the policy. By learning about the Section 7702 code, you can better understand a policy’s tax-advantage status and the impact on your cash value account.

Key takeaways
  • Section 7702 of the Internal Revenue Code defines the guidelines for cash value life insurance policies and how to retain tax-advantaged status.
  • Section 7702 “plans” are not really plans at all. Instead, they are privately issued cash value life insurance policies and can be a whole, universal, variable or indexed policy.
  • A 7702 plan refers to a cash-value life insurance policy that has cash value in addition to the death benefit.

What is Section 7702?

Section 7702 of the Internal Revenue Code defines the criteria that cash value life insurance policies must meet to retain their tax-advantaged status. This section 7702 code outlines the guidelines for premiums paid and defines the corridor and cash value accumulation tests that must be satisfied for a permanent policy’s cash value to grow on a tax-deferred basis.

Section 7702 rules apply to any cash value life insurance policy that was issued after 1985, based on the following guidelines:

  • There are two “tests” to qualify for tax advantages: A cash value accumulation test (CVAT) (or the guideline premium) and corridor test (GPT).
  • If a contract does not meet the guidelines, the proceeds from the policy are treated as income.

The term “7702 plans” does not refer to qualified plans in any sense, and any cash value life insurance policy you buy is subject to the same tax rules.

What is a Cash Value Accumulation Test (CVAT)?

The CVAT is one of the tests outlined and defined in Section 7702. The code states the cash value test is met “if the sum of the premiums paid under the contract does not at any time exceed the guideline premium limitation as of that time.” This means the money the policyholder receives from their policy if they decide to cancel cannot be more than what they would have paid for the policy in a lump sum, excluding fees. The money the policyholder receives if there is a cancellation is referred to as the cash surrender value.

An example of a policy that would qualify for the CVAT test is term life. Unlike whole, universal and variable policies, term life does not build cash value. If you are a term life policyholder, you will not receive any payout if you give up your policy. This is one reason why the premiums for term life insurance are typically less expensive, since there is no cash value component to most term policies.

Why is Section 7702 important?

Section 7702 is an important code because it dictates which types of cash value life insurance policies are eligible to receive tax-advantaged treatment. If a life insurance policy does not meet the criteria listed in this section of the Internal Revenue Code, then both the growth of the cash value inside the policy and the death benefit will be counted as taxable income to the beneficiary. The majority of life insurance policies today meet the criteria of this code, so this is seldom an issue for policyholders.

Section 7702 in the Internal Revenue Code was created in response to the large number of life insurance policyholders who were using cash value life insurance as a tax shelter. Many policies that were issued before 1985 offered enormous growth potential in their cash value component, which the IRS sought to prevent by implementing Section 7702 rules. Since 1985, life insurance cash values have had set limits that must be followed in order to retain their tax-advantaged status.

How Section 7702 plans work

As mentioned previously, Section 7702 “plans” are not an individual type of life insurance policy. They are standalone cash value life insurance policies. Some insurance agents may have called them by “7702 plans” to ensure clients that they were enrolling in a type of qualified plan where contributions have tax advantages.

However, 7702 plans are not like retirement plans, such as 401(k) or individual retirement accounts (IRA). An important difference is that 401(k) plans allow for pretax contributions (unless it is a Roth plan), while 7702 plans are funded with after-tax money. Unlike a qualifying retirement account, if you contribute to a 7702 plan, you cannot deduct the cost of the premiums you pay because the IRS views them as a personal expense and not as a retirement plan contribution. The cash value in these policies grows tax-deferred and policyholders can take out tax-free policy loans from them. But this is the case for any cash value policy, regardless of whether or not it is called a 7702 plan.

A 7702 plan can be a whole life policy, a universal life policy, a variable universal life policy or an indexed universal life policy. The amount of cash value that accumulates inside the policy depends on which type of policy it is and the amount paid into it over time. Variable policies have the potential for higher growth in the long run, but they can also decline in value when the markets drop. Indexed universal life policies tend to be safer because the policyholder’s cash value is guaranteed not to decrease if its associated index performs poorly. However, they have lower long-term growth potential compared to variable policies. Regardless of what kind of policy is used, Section 7702-qualifying policies always have tax-free death benefits

How is a 7702 plan different from a retirement plan?

A 7702 plan refers to a cash-value life insurance policy, which is a life insurance policy that has a cash value beyond the death benefit. When you pay premiums into these kinds of policies, some of the premium goes to the death benefit and some of the premium goes to the policy’s cash value.

One of the main reasons why someone may want to reconsider buying a cash-value life insurance policy for the purpose of investing is that these policies can come with expensive management fees, mortality and expense charges and administrative expenses that can contain agent commissions.

On the other hand, qualified retirement plans, such as a 401(k) received through your employer, generally do not require commission fees to enroll in the plan. However, this does not mean that there are no fees involved with a 401(k) or other qualified retirement plans, such as a Roth account. You should always pay close attention to the terms of whichever retirement plan you consider to ensure you understand the total cost of the plan.

How well a 7702 plan performs compared to other retirement plans depends on the investments made with the funds you contribute to the plan. Whatever plan you choose, it is a good idea to have a firm understanding of the investments your money is tied up in.

Frequently asked questions

Written by
Sara Coleman
Insurance Contributor
Sara Coleman is an insurance contributor at Bankrate. She has a couple of years of experience in writing for insurance domains such as The Simple Dollar,, and numerous other personal finance sites. She writes about insurance products such as auto, homeowners, renters and disability.
Edited by
Insurance Editor
Reviewed by
Founder of Felton & Peel Wealth Management