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What is a 7702 life insurance plan?

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Quick Answer

A 7702 life insurance plan is a life insurance plan defined by tax code Section 7702, Bankrate states. These plans have limited benefits and premiums compared to the death benefits and are taxed under specific guidelines, Investopedia explains. Section 7702 regulates all life insurance plans created after 1985.

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Full Answer

Under Section 7702, life insurance policies are defined according to strict criteria, and each candidate program must pass one of two tests to be classified as a life insurance policy, Investopedia notes. Satisfying these standards allows a program to gain preferential tax treatment. Section 7702 allows a choice between the guideline premium and corridor test and the cash value accumulation test.

Section 7702 requirements were created to set clear standards for life insurance plans and ensure another investment vehicle cannot enjoy the tax advantages of life insurance policies, Investopedia explains. Prior to the introduction of Section 7702, taxation of life insurance policies was light, which resulted in some investment vehicles being touted as life insurance plans. The advantages held by life insurance plans before Section 7702 include not treating earnings and interest accruing in the policy as income for the policyholder, setting first-in-first-out as the taxation basis for distributions and imposing no income taxes on life insurance beneficiaries who receive death benefits. Life insurance policies had enjoyed these advantages, since any attempt to reduce them was seen as politically difficult.

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