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What you need to know about the 702 “Retirement” Account

If we told you there was a retirement account that can help you maximize your returns and minimize your losses, you would probably be excited. So would we. After all, this is what every investor wants, particularly in a retirement plan. This is why we understand our clients’ excitement when they come to us asking if a 702 account is a good choice. 

In this article we will explain:

  • What is a 702 plan?
  • What are the tax advantages of a 702?
  • Should I use a 702 plan to save for retirement?

A 702 plan is also known as a 7702 or a 702(j) account.

This account promises to pay a return of almost 60 times a standard bank account. The best part is it promises to do so tax-free. Those hearing about the account have heralded it the “It” retirement account, used by Bill Gates and Warren Buffet. With so much press surrounding this retirement account, it’s no wonder investors are clamoring to know more.

If you’ve followed us for a while, then you already know that if something appears too good to be then then it most likely is just that. The 702 account is no exception to this rule.

In fact, the 702 account is not even a retirement account. It’s a life insurance policy, named for Internal Revenue Code 7702, which regulates life insurance contracts.

A 702 Retirement Plan is Not A Retirement Solution

term insurance vs permanent whole life insurance

Term Insurance versus Permanent Insurance

Permanent, or whole, life insurance provides a policyholder with coverage for the rest of his or her life, so long as the premiums on the insurance are continuously paid. A portion of the premiums paid toward this policy is funneled into an account to build cash-value. You can either choose to borrow against the cash value, use it to pay off the remainder of your premiums or let it sit and accrue value.

A 702 policy is not much different from a typical permanent life insurance policy. You pay premiums – higher than normal, in this case – to fund the policy. You can then borrow from the policy’s cash value during your retirement – tax free. Also, your death benefit will decrease by how much you have borrowed, once you pass away. 

Tax savings are not the only important aspect to planning for retirement, however, and this type of strategy comes with risks. For example, if you cannot pay back the loan, anything you’ve earned from investments is potentially taxable.

One of the biggest risks posed by this type of investment is the financial risk it poses to your family. If you pass away while your loan is unpaid, the death benefit will be used to repay the loan. This means that your family may not see their benefits. If you are buying life insurance to provide for your family, then you are better off utilizing a traditional retirement plan.

Diverting From A 401k

In fact, if you are using a permanent life insurance policy to save for retirement then you are most likely shifting money away from a 401(k).

Permanent life insurance policies are expensive, and the premiums you pay are better off being diverted into an actual retirement account. Especially if your employer matches your contribution like in most 401k’s. Additionally, you are missing the boat on tax deductions associated with IRA and 401(k) accounts.

Mistakes To Avoid

  1. Using a permanent insurance policy as your only savings for retirement. 
  2. You assume that the permanent policy will grow significantly by refinement.
  3. You haven’t considered all your options before saving in a life insurance policy.

Your cash value on these policies will grow slowly. So you won’t necessarily have a guaranteed return on your investment. You can get a guarantee on your principal on some insurance policies. However, there is a cap to your returns.

If you are a high net worth earner and you have reached the limit on your 401(k) and IRA accounts, you are better off switching to a taxable retirement account. If you are a business owner, there are other pension plan options you should consider before a 702.

cash value permanent life insurance

One of the downsides to permanent life insurance is the slow cash value build up. The longer you have the policy the higher the rate of return

retirement income with permament life insurance

Pros to permanent life insurance is the ability to withdraw supplemental retirement income each year protecting your principal and leaving a death benefit to beneficiaries.

Bottom Line on the “702 retirement plan”

A life insurance policy is not a retirement plan. So you shouldn’t use a 702 for retirement. 

In reality, you need to consider Life insurance a necessary component to a solid financial plan. However, it is important to remember that the purpose of life insurance is to provide for your loved ones when you are no longer around to do so. 

Utilizing a permanent life insurance policy for retirement can have harsh financial consequences after you pass away – and during your retirement. Additionally, a retirement budget may be stretched thin by the high premiums of this type of life insurance policy.

You are better off buying an inexpensive term policy. While continuing to invest in traditional retirement vehicles. By doing this, you will see more growth in your nest egg and will still be able to provide for your family and loved ones. If you’ve considered – or, perhaps, have already started – a 702 plan for your retirement, give us a call today.