What is a life insurance 7702 plan?

The Internal Revenue Service loves numbers. U.S. Tax Codes are all numerically identified. So, it is no surprise that when you talk about any kinds of financial products, there is a number attached to it.

For instance, you may have a 401(k) for your retirement or a 529 for your kid’s college education. A 7702 refers to life insurance products.

The official definition of 7702 is specifically to determine what parameters make a product life insurance and how it is to be treated by the tax code. That basically defines whether you pay taxes on proceeds and when, if ever.

Specifically, life insurance 7702, or Section 7702 of the tax code limitations premiums and subsequent benefits as they relate to the death benefit. It further delineates what constitutes a life insurance contract, specifically any established after 1985.

The specific tax code is listed here. It is not exciting, but certainly informative. For instance, the cash accumulation needs to be one of the following, according to the IRS Guidelines:

1. Satisfy test of the cash-value accumulation under 7702(b)
2. Meet both premium requirements of 7702c be within cash-value of 7702d

What is the cash value corridor? It means that the death benefit is never less than the cash surrender value.

Overall, the 7702 is just saying that the product you purchased is life insurance. Basically, the tax code is made to ensure that these tax-favorable products are kept in their place, rather than taken advantage of by opportunistic and perhaps greedy financial companies.

The benefits of tax savings are given as good will to families who have typically just lost a parent, and significant breadwinner.

Otherwise, it is likely that insurance companies or financial institutions might create products that are meant to fleece people. That’s not a real life problem, though. All you as a consumer need to know is that the proceeds of a life insurance policy, the death benefit, is given tax free.

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Understanding Payouts and Loans

Maybe you are more concerned with the taxation because you are interested in taking out a loan or a cash distribution from your existing life insurance policy.

For starters, the term life policies have no cash value, and are not eligible for cash payouts.

1. Whole Life Insurance
2. Variable Universal Life Insurance
3. Universal Life Insurance
4. Variable Life Insurance

Whole life insurance has a fixed premium for life. It has a cash value that grows as expected, like clockwork, and is guaranteed. The policy is rather rigid and fixed, and the investment is fixed, meaning you have no say in investment vehicles to gain or lose the cash value.

Meanwhile, universal life insurance gives you the power to determine how much and when you pay premiums, according to an overarching set of parameters.

You have the freedom to change the coverage as you see fit. It is similar to whole life in that the cash value is guaranteed to increase, but still you have no say in where the money is sent to grow.

The third type of cash-value-gaining life insurance lets you manage how you want to spread out the cash value, whether across bonds, into stocks, or even money market accounts.

There are different levels of risk and reward, meaning you may lose your cash value, and therefore it is not guaranteed. You do have the power to change the coverage amounts over the course of the policy.

Variable universal life insurance is another policy type, which as the name implies, is a hybrid of variable and universal types of life insurance.

It is deemed the most flexible because you have the power to alter premium payments, coverage amounts, and opt for different investment vehicles to grow or lose cash value.

Transfers among different investment vehicles is tax free.

Variables Impacting Life Insurance Premiums

Life insurance costs may vary greatly from one individual to the next. Depending upon the types of characteristics you select, in addition to death benefit limits, you may find your costs vary a lot too.

1. The age when you buy your policy. As you age, the policies carry heavier premiums.
2. Health of applicants. Medical testing provides a chance for applicants to demonstrate that they are healthy, or managing their chronic or an acute illness despite gravity of conditions. This included pre-existing conditions, such as diabetes, cancer, HIV, or even heart disease, among others.
3. Health habits that cost a great deal more include excessive drinking and smoking up to five years, generally.
4. If you have dangerous hobbies or a dangerous job, such as a professional skiier, rock climbing enthusiast, or flying airplanes, life insurance limits go up considerably.
5. In addition to the medical conditions and dangerous hobbies and habits, the insurers are interested in finding out how well you handle yourself on the roadways. Vehicle insurance claims, DUI convictions, moving violations, and speeding tickets are all ways that your life insurance premiums may climb.
6. Pooling of applicants may increase or decrease your rates, depending upon in which region you reside.

Filing A Life Insurance Claim

Generally, proceeds are paid out to beneficiaries with 30 to 60 days after they claim the benefit.

It is important that the beneficiaries know they have that role, because often the insurance carriers have no idea that the policyholder has passed.

Furthermore, if there is an irrevocable trust or trust that holds the policy, then the insurance carrier will need to have a record of this on file.

That is partly why it is so important to have an estate attorney involved in the preparations. They know what needs to be reported to whom and how.

If the policyholder had the agreement less than two years, payouts may take longer, up to one year, because the insurer will be searching out the application for fraudulent statements.

There are other aspects of insurance that allow policyholders to use the death benefit before they pass. Such instances may be terminal illness, or for long term care.

Find out before you need to file a claim, because many times policyholders need this ability more than anything else.

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