{"id":3903,"date":"2013-05-09T09:11:03","date_gmt":"2013-05-09T16:11:03","guid":{"rendered":"http:\/\/canary.kcprod.info/blog\/?p=3903"},"modified":"2022-01-11T17:12:43","modified_gmt":"2022-01-12T01:12:43","slug":"7702-retirement-plan","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/7702-retirement-plan\/","title":{"rendered":"7702 Retirement Plan? There\u2019s No Such Thing"},"content":{"rendered":"

A<\/span> growing number of insurance companies and independent financial advisors have been selling \u201c7702 Plans,\u201d sometimes referred to as a “7702 Private Plan,” for retirement.
\nOn Google alone, a query for \u201c7702 plan\u201d results in almost 1.5 million pages of matches.<\/p>\n

This is fascinating, largely because there is no such thing as a 7702 plan.<\/p>\n

A vehicle for selling life insurance<\/h2>\n

If you go to one of the thousands of websites, you\u2019ll find a description of something that sounds like a 401(k) or IRA, but is based on life insurance. The page will explain that unlike traditional retirement plans like 401(k) and IRA accounts, \u201clife insurance retirement plans\u201d have no limit on contributions or size, and no requirements for withdrawals at a certain age.<\/p>\n

A 7702 is not a \u201cretirement plan\u201d as most people understand retirement plans. Rather, it\u2019s another name for a life insurance policy, often variable universal life<\/a>.<\/p>\n

\"35456130\"<\/a>I first learned about the term \u201c7702 plan\u201d in a Starbucks in Palo Alto a few months ago. Elliot Shmukler (our VP of Product) and I were walking to Starbucks in Palo Alto, discussing Wealthfront. Unsolicited, a woman interrupted us and asked if we did \u201c7702 Plans\u201d? \u00a0It turned out she was a professional financial advisor, and she proceeded to give us a helpful \u201ctip\u201d to grow our business: sell 7702 plans!<\/p>\n

Insurance agents and financial advisors are using this tactic to aggressively market expensive life insurance policies. \u00a0No thanks.<\/p>\n

Marketing gimmick: Mimic the 401(k)<\/h2>\n

There are very few people who actually cite lines of tax code like citations from Shakespeare, but there is one section of the tax code that is famously quoted: the 401(k). Yes, there is actually a \u201csubsection 401(k)\u201d of the Internal Revenue Code, dating back to 1978, that allows corporations to provide tax-deferred retirement accounts to their employees.<\/p>\n

The Internal Revenue Code also has subsection 7702. It\u2019s the section that discusses the tax implications of life insurance contracts. Some advisors are using the construct of the 401(k) name to relabel life insurance policies as 7702 plans, thus associating them with the concept of retirement plans.<\/p>\n

\u201c7702 Plan\u201d is just a marketing term used to allow an existing set of life insurance products to borrow some of the credibility from the IRA and the 401(k). Linking life insurance policies subversively to 401(k)s makes them easier to sell. It doesn\u2019t make them retirement plans.<\/p>\n

It\u2019s not an account, and it\u2019s not a plan<\/h2>\n

It\u2019s important to note that this isn\u2019t a post about how bad whole life insurance is. \u00a0(Andy Rachleff recently authored Why Whole Life Is A Bad Investment<\/a>.) Nor am I arguing that whole life insurance (and universal life and annuities) do not have tax benefits that can be turned to your advantage. As a society, we have chosen not to tax death benefits.<\/p>\n

\n

A life insurance policy is a contract between you and the company.<\/p>\n<\/div>\n

What life insurance clearly is NOT is a retirement plan like a 401(k). The marketing of whole life insurance policies as a form of savings and investment is wholly the creation of the insurance industry.<\/p>\n

A 401(k) or an IRA is an account that holds assets that you own, but an institution has on deposit for<\/em> you. There are extensive regulations and definitions around companies and organizations that are allowed to hold the accounts and manage the relationship with you.<\/p>\n

A life insurance policy, in contrast, is a contract<\/em> between you and the company. At its base, the policy is an arrangement between you and the life insurance company. The terms are set at the beginning and generally are highly favorable to the insurance company, and you can\u2019t change them as your life evolves. \u00a0While the terms on variable universal life policies are more flexible than whole life, the economics are designed to be extremely profitable for the insurance company.<\/p>\n

Huge commissions lead to aggressive sales<\/h2>\n

Leveraging historical tax treatment for life insurance policies, the industry has continued to generate a never-ending set of incredibly profitable<\/a> products, allowing them to pay enormous commissions to the people who sell insurance products to individuals. It\u2019s not surprising to see an aggressive tactic like labeling these products \u201c7702 Plans\u201d and \u201c7702 Private Plans.\u201d<\/p>\n

The high profitability of these products gives the incentive for a wide range of financial services to sell these products. A product that is highly profitable for an insurance company is often a poor deal for you.<\/p>\n

Don\u2019t be fooled<\/h2>\n

If you are approached by someone touting the advantages of a 7702 private plan, know that they are (1) talking about life insurance, and (2) that they are using a relatively new, and fairly aggressive sales technique.<\/p>\n

At Wealthfront<\/a>, we recommend that people who want to save for retirement take advantage of low-fee, well diversified portfolios in IRAs. Be informed, be careful and do your own research. (Take a look at our retirement section<\/a> for more on this particular topic). We\u2019re continuing to work on an analysis of the tax benefits of whole life compared with the tax benefits of an IRA and hope to publish it in the next few weeks.<\/p>\n

Disclosure<\/strong><\/span><\/p>\n

Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security or insurance product.\u00a0 Wealthfront is not a licensed insurance agent.\u00a0Past performance is no guarantee of future results.<\/b><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

A growing number of insurance companies and independent financial advisors have been selling \u201c7702 Plans,\u201d sometimes referred to as a “7702 Private Plan,” for retirement. On Google alone, a query for \u201c7702 plan\u201d results in almost 1.5 million pages of matches. This is fascinating, largely because there is no such thing as a 7702 plan. […]<\/p>\n","protected":false},"author":63,"featured_media":7269,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1278,1367],"tags":[1311,1287,1312,1301,1366,1294],"coauthors":[176],"class_list":["post-3903","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-planning","category-retirement","tag-401k","tag-financial-advisors","tag-ira","tag-investing-mistakes","tag-retirement-2","tag-taxes"],"acf":[],"yoast_head":"\n7702 Plans Are Not Retirement Plans | Wealthfront<\/title>\n<meta name=\"description\" content=\"A 7702 Plan is just whole or variable universal life insurance. 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