A Whole Life Strategy for Minimizing Taxes in Retirement

While we tend to focus on ways to minimize taxes while we’re working, it’s also important to consider how to make retirement less taxing. One tax minimization strategy for retirement is the 7702 plan, which you fund with after-tax dollars. It’s a life insurance policy that augments the death benefit protection with an investment vehicle that has relatively little risk and no tax penalties for early withdrawal.

As a physician with long-term earning ability, you may find several advantages to making a 7702 plan part of your portfolio for retirement, especially if you have maxed out your contributions to other plans. In other words, if you can’t put any more money in your 401(k), IRA, or Roth IRA and want to increase the cash value inside your retirement portfolio, a 7702 is one way to diversify. It provides a tax-free income resource and creates a legacy for your beneficiaries.

Here’s what you need to know.

What is a 7702 Plan?

Let’s follow the origins of 7702. The primary purpose of life insurance is to provide your family with a tax-free death benefit in the event of your death. But when some companies created life insurance products with significant investment features that offered tax benefits, the federal government intervened to revise the tax code.

The Internal Revenue Code (IRC) 7702 clarifies the federal government’s definition of a life insurance contract and how it is taxed. It also places limits on premiums and tax benefits for life insurance. Finally, it establishes a test for life insurance designed to ensure that traditional investments do not masquerade as life insurance in order to receive favorable tax treatment.

Thus, a 7702 is not a retirement plan per se. It’s an insurance policy named for Section 7702 of the US tax code. Specifically, it’s a cash value or variable universal life insurance policy (VUL) policy. The savings component of the policy can be invested, allowing you to build cash value as you would with a mutual fund. There is usually a minimum floor and a maximum cap on returns, which in the past have averaged midway between those of stocks and cash.

The Benefits of 7702s
The key benefits of 7702s include:

  • Tax-free income and tax-deferred growth
    You can use 7702 plans as part of a balanced portfolio, accessing similar tax-free income benefits to a Roth IRA. Funded with after-tax dollars, 7702s grow tax-deferred.


  • Flexibility and accessibility
    They are more flexible and accessible than, for instance, 401(k) s and IRAs. There are no early-withdrawal tax penalties (withdraw up to the amount paid in premiums at any time, tax-free) and no limitations on how you use your money or how much you fund your policy. This flexibility makes 7702s a good option for high-income earners who have maxed out on other retirement vehicles and need a place to stash their cash.


Is a 7702 Plan Right for You?

If you have established a financial plan, set up your 401(k) or IRA and are regularly contributing, but want to diversify to limit post-retirement taxes, then a 7702 plan may be right for you. Also, you might want to consider them if you’ve hit the limits on traditional retirement plan contributions.

If you want to explore this option further, here are some questions and answers that you should explore fully with your financial advisor:

  1. How safe is a 7702 plan investment?
    Although not protected by FDIC, a 7702 plan is backed by the insurance company issuing the policy. Should the company fail, your policy is protected by funds collected from firms and managed by the various state departments of insurance. Ask about the protection limits for your state and policy type.


  1. Should I start early?
    There’s no question that premiums are lower when you are younger and in good health. Wait too long, and the premiums may be prohibitive. As long as you treat a 7702 plan as just one component of a balanced and diversified financial and retirement plan, then it may make sense to start early since whole life and VULs are long-term investment strategies.


  1. Are my premium payments tax-deferred or tax-deductible?
    Neither. Your premiums are after-tax payments, and because they are designated as a personal expense, premiums are not tax-deductible.


  1. Does a 7702 plan provide death benefits?
    Yes. Your beneficiary will receive tax-free funds just as with any other life insurance policy.


Get the facts about the 7702 policy you’re considering, including premium costs and fees, before you commit. Discuss with your financial advisor how best to integrate a 7702 into a sound retirement and investment strategy.




Contact Information

AAFP Insurance Services
Attn: Policyholder Services
PO Box 7470
Leawood, KS 66207-0470

(800) 325-8166

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