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Is a 7702 variable life insurance policy a good investment?

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Quick Answer

Section 7702 variable universal life insurance policies are a good investment choice for investors who benefit from flexible premiums, adjustable death benefits and guaranteed limits on fees, according to Section7702.com. The cash values of these policies are invested in current-interest accounts and variable accounts. Variable accounts incur market risk.

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Full Answer

Current-interest accounts pay variable-interest rates based on current market rates, Section7702.com notes. The insurance companies determine these rates based on portfolio yields or new money rates, and adjust the current-interest accounts accordingly. Current-interest accounts also feature a guaranteed minimum-interest rate.

In contrast, cash values kept in the policy's variable sub accounts are subject to the market fluctuations of the account's underlying vehicles, such as stocks, bonds, real-estate and commodities, explains Section7702.com. These accounts offer higher-potential returns with consequent market risk. Unlike the current-interest accounts, the variable accounts have no yield floor. The result is that investors are subject to the risk of lost principle.

Section 7702 is the section of the United States Internal Revenue Code that defines how life insurance contracts are taxed, explains Investopedia. In order for an insurance policy to be considered life insurance for tax purposes, the policy must pass two tests: the cash value accumulation test, and the guideline premium and corridor test. The CVAT requires the cash surrender value of the policy to not exceed the premiums required to fund future benefits. The GPT requires premiums paid to-date not exceed the one-time premium required to fund the contract.

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