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What are 7702 Private Plans?

May 1, 2013   |   by Timothy Hider

IRS 150x150 What are 7702 Private Plans?It appears there are agents with ads and websites promoting 7702 Private Plans or 7702 Private Pension Plans.  The section of the Internal Revenue Code 7702 relates to the funding of permanent life insurance contracts.  A detailed overview of Section 7702 can be found here: http://www.nongnu.org/lmi/7702.html

Tax Treatment of Life Insurance Products

The term 7702 Private Plan is sort of like “401k” when reading the Internal Revenue Code.  Life Insurance products enjoy many valuable attributes; i.e. tax deferred growth, distributions may be taxed on a First IFirst Out (FIFO) basis and death benefits are generally not taxed.  These are quality benefits in comparison to leaving a beneficiary in financial ruin.  It becomes an issue when individuals try take advantage of loopholes and avoid taxes.  Section 7702 of the Internal Revenue Code was enacted to impose limitations on premiums and cash value in relation to death benefits.

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Generally these strategies or promotions draw people in because of the language.  You might want to learn more if you were looking for alternatives to Qualified Plans and see the following:  See retirement planning, private pension plans without contribution limits, no penalties for early distributions and income passed to heirs tax.  Qualified Plans such as Defined Contributions (401k, IRA or ROTH) and Defined Benefit (Pensions) follow the guidelines of ERISA (Employee Retirement Income Security Act).  These rules are in place for a reason, the government wants individuals to save for their future.  There is an Internal Revenue Code Section 7702, however it does not follow the guidelines of ERISA.  The language highlighted in bold above may seem appropriate because it is true.  Look past the sales pitch, expenses and know what you are buying.  If it is too good to be true, it probably is.

If you are searching for alternatives to grow wealth and supplement retirement income permanent, or cash value life insurance contracts, if designed properly can be efficient.  Highly successful business owners and their key employees might consider Non-Qualified Deferred Compensation Plans (NQDC).  While NQDC plans do not follow ERISA guidelines they must adhere Internal Revenue Code section 409A.  Click the following link to learn more about our Top Hat Exemption Plans.

Tip: If you sell life insurance be upfront and do not try to misrepresent what you are selling.  It causes confusion and might lead to a lawsuit.  Beware of misleading advisors pitching “Section 7702 private pension plans”.  See the footnote below about a recent insurance company being fined millions of dollars for misrepresentation:

Buyer Beware!

“The term “private pension,” used when referring to a life insurance policy, is one that has also come under serious criticism.  In a fairly recent lawsuit, a company was sued for unethical sales practices because its agents were selling life insurance policies and calling them “private pension plans.”  The settlement in this class action suit amounted to several hundred million dollars.  The problem in the use of the phrase may be obvious once we look more closely at it.  The phrase “private pension” obscured the true nature of the product. Since the product being sold was a life insurance policy rather than a pension plan, the court considered use of the term to be inherently misleading.”

Source: http://www.wallstreetinstructors.com/ce/continuing_education/ltc8/id63.htm

Until next time, be safe and be well. Find out how much an individual life insurance policy might cost you by clicking here.  Don’t let agents mislead or misrepresent others you may know, share this post using one of the social media icons below.


The information on this website is designed to be general in nature and for educational purposes only. Momentum Risk Transfer, its agents and employees do not give tax, financial or legal advice. For specific advice, seek and rely upon the advice of a qualified tax advisor or attorney.

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