{"id":33259,"date":"2022-12-14T23:33:00","date_gmt":"2022-12-14T23:33:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=33259"},"modified":"2022-12-15T12:49:13","modified_gmt":"2022-12-15T12:49:13","slug":"irs-code-7702","status":"publish","type":"post","link":"https:\/\/businessyield.com\/accounting\/irs-code-7702\/","title":{"rendered":"IRS CODE 7702: Definition, Important & How It Works","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n
Tax advantages are one of the benefits of life insurance for you and your family. In addition to a tax-free death benefit, the cash value of permanent life insurance grows tax-deferred and is never taxed as long as the policy is in force. The regulations governing how life insurance qualifies for tax benefits are defined in IRS section 7702 of the federal tax code. The government recently changes the laws governing IRS 7702 and it has been in the headlines recently. But, exactly, what did legislators do? It gets confusing quickly, but here’s a short explanation to help you grasp it better.<\/p>\n\n\n\n
For tax purposes, 7702 of the Internal Revenue Code (IRS) defines life insurance contracts. This section of the code is intended to differentiate genuine insurance contracts from investment products that are advertised as insurance-like.<\/p>\n\n\n\n
Beneficiaries of life insurance contracts typically receive tax-free death benefits. Tax-free growth is possible with cash value policies. The purpose of IRS code 7702 is to prevent tax-advantaged life insurance from being abused. It achieves so by requiring life insurance contracts to pass a two-part test.<\/p>\n\n\n\n
Prior to the enactment of IRS code 7702, federal tax law adopted a very hands-off attitude to life insurance policy taxes. Any earnings accrued inside the policy during the policyholder’s lifetime were not taxed as income, and death benefits paid to life insurance beneficiaries were excluded from income tax.<\/p>\n\n\n\n
While the government did not want to be viewed as punishing needy widows and children, issues occur when the system can be cheated. Such as when other types of investment accounts are off as life insurance products.<\/p>\n\n\n\n
To counteract this, IRS code 7702 established a set of standards to ensure that only genuine life insurance policies, not investment vehicles posing as such, received favorable tax treatment.<\/p>\n\n\n\n
As previously stated, IRS code 7702 “plans” don’t actually plan at all. They are stand-alone cash-value life insurance plans offered by private companies. Some insurance agents may have referred to them as such to give the impression that they were enrolling in a qualified plan. On the other hand, IRS Code 7702 plans are not qualified and bear no resemblance to truly qualified plans like 401(k) plans. A key distinction is that 401(k) plans accept pretax contributions (unless it’s a Roth plan). Whereas 7702 programs only accept after-tax contributions. The cost of premiums paid to a 7702 plan cannot be deducted because the IRS considers them a personal expense rather than a retirement plan contribution. The cash value of these insurance policies grows tax-deferred, and policyholders can borrow money from them tax-free. This is true of any cash value policy, whether or not it is to as a 7702 plan.<\/p>\n\n\n\n
A whole life policy, a universal life policy, a variable universal life policy, or an indexed universal life policy are all examples of 7702 plans. The amount of cash value that builds up inside a policy is on the type of insurance. The amount of premium paid into it over time. Variable plans have the potential for stronger long-term growth, but they can also lose value if markets fall. Indexed universal life plans are safer since the cash value of the policyholder is not decrease if the underlying financial benchmark index to which the policy performs poorly.<\/p>\n\n\n\n
The change in the minimum guaranteed cash value is the reason why individuals are concerned about the IRS code changes in the tax code. Until recently, whole life insurance’s cash value component was based on a variable rate with a floor of 4%. This floor enabled insurance firms to precisely evaluate policy costs. Allowing them to charge rates that prevented policies from becoming MECs.<\/a><\/p>\n\n\n\n