The issue of the 7702 Plan is done privately as a standalone cash value insurance policy. This life insurance policy can be either whole, universal, indexed universal, or variable universal. You should know that section 7702 plan is neither a qualified plan nor a retirement plan.

Difference between 7702 plan and retirement plans

The guidelines and value of a 7702 plan depend on the type of insurance policy the person is getting and the amount of premiums cost. In the 7702 plan, they don’t allow pretax contributions and the money has to be funded only after-tax money.

Comparatively, in 401(k) plans, the people are allowed to make contributions before-tax money, unless the plan is a Roth one. Those who contribute to a 7702 plan are not able to deduct the premium price that they pay as IRS sees it as an expense paid for personal purposes.

The benefit of this plan is that cash value will increase tax-deferred. In fact, policyholders are allowed to take out policy loans without paying taxes on them.

How does section 7702 plan work?

When the life insurance policy is qualified to get tax advantages for the contributions, the policyholders will likely receive calls from insurance agents to inform them about the plan. Over the years the cash value amount is likely to get accumulated inside the policy. However, the amount will depend on the type of policy and how much the policyholder has added to it over time.

In the long run, variable life insurance policies have high growth potential. However, as per the financial experts, the value can decline with a drop in the market. Most people consider indexed policies a safer option as their cash value won’t decrease even if the connected index is not performing well.

Compared to variable policies, indexed life insurance policies have lower growth potential in the long term. Doesn’t matter the type of policy you plan to use, the section 7702 will give tax-advantaged treatment to the qualifying policies.

Conclusion

We hope now you understand how the section 7702 plan works and how it is different from a retirement plan. One thing to remember is that the plan has to pass through two tests to enjoy a tax-advantaged treatment that is provided to different life insurance policies.