IRC 7702 Pros and Cons

What You Need to Know about the 7702 Plan

Many insurance agents market a “7702 plan” as a type of retirement plan similar to typical retirement plans, like a 401(k). Sometimes important details are ignored in this process. We’re going to break down what the 7702 plan really is, what it means and how this relates to life insurance.

What Is an IRC 7702 Plan?

A 7702 plan is not a retirement plan, it’s a life insurance policy. In fact, any  life insurance policy could be called a “7702 plan” because all life insurance policies are covered by section 7702 of the Internal Revenue Code (IRC). Many insurance agents use the term “7702 plan” to avoid saying life insurance right away in conversations with potential clients. But obviously, life insurance is not inherently bad if it’s set up correctly to meet the proper needs.

Here at McFie Insurance, we design or review “7702 plans” for our clients daily – and we call these policies by their authentic names: Participating Whole Life Insurance, Indexed Universal Life Insurance, etc.

Many advisors will tell you that you should pay as little as possible for your life insurance. But high premiums are not always bad when you’re in the right financial situation. In fact, when a policy is designed well, higher premiums can help you build cash value and overcome the cost of insurance faster.

An IRC 7702 plan is a cash-value life insurance policy with higher premiums than a term insurance policy. There are many benefits of owning a high-premium-high-cash-value 7702 plan. We talk about some of these benefits later in this article.

How Does an IRC 7702 Plan Work?

How a 7702 plan works

An IRC 7702 plan works just like a life insurance policy because it is a life insurance policy. Your premium goes towards the purchase of a death benefit. The plan may build cash value as well. After death, your family is paid the death benefit from the policy / 7702 plan. The cash value can be used during your lifetime either by taking a withdrawal or leveraging that value to take a policy loan from the insurance company. Think of cash value as your equity in the life insurance death benefit.

Even though it is not accurate to refer to a 7702 plan as a “retirement plan,” good life insurance policies like we design at McFie Insurancecan put you miles ahead when it comes to saving for retirement.

Saving for retirement with whole life insurance (aka a 7702 plan) can open better options for more sustainable retirement income than typical financial planning which relies mainly on tax-deferred plans such as 401(k)s and IRAs.

A typical investment portfolio cannot provide guaranteed growth. A good life insurance policy / 7702 plan will provide guaranteed growth on your money. This gives you confidence and financial peace of mind.

Section IRC 7702 Changes

In December 2020, Congress made changes to section 7702 for the first time since it was created 32 years before in 1988.

Through the Consolidated Appropriations Act, the minimum interest rates to be used in the design of cash-value life insurance products were changed to allow for continued low-interest rates across the rest of the economy.

Existing policy owners do not need to worry about their guaranteed policy values since these changes do not affect existing policy guarantees unless significant changes are made to an existing policy.

As of January 2022, life insurance companies have updated their new products in accordance with this legislation. Many companies have endeavored to keep high guaranteed cash values while dividends are projected somewhat lower across the industry. Premiums tend to be slightly higher in order to build similar cash value. 

None of these changes negate the value of using whole life insurance/7702 plan as an important financial tool and a liquid form of savings in addition to the permanent death benefit.

Seeing the numbers from the insurance companies we represent here at McFie Insurance, we think the findings of the Society of Actuaries have been reflected pretty accurately across the industry resulting in:

  • higher guaranteed cash values;
  • higher premiums to support those cash values;
  • lower net amount at risk (less mortality risk);
  • premiums and dividends applied to buy paid-up additions would purchase less death benefit; and
  • less risk to the company in a sustained low-interest-rate environment.


An IRC 7702 plan is not a retirement plan. It’s a section of the internal revenue code that dictates how life insurance will be treated for tax purposes. Some experts say life insurance is the single largest benefit in the tax code. Thanks to section 7702, life insurance is not just effective for providing financial protection for your loved ones when you die, it is also a great way to grow your wealth while you’re alive. It can provide retirement income for you in your golden years and it lets you leave money to your spouse, your children, and your grandchildren income tax-free! With a better understanding of the IRC 7702 pros and cons, you can make more informed decisions about your life insurance for your financial success.

To see the numbers for a well-designed life insurance policy/7702 plan and how this could benefit you, call McFie Insuranceat 702-660-7000 or schedule a time for us to call you.

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