By Ford Stokes, RSSA, MBA

When it comes to planning your retirement, you’ve likely heard of IRAs, Roth IRAs, 401(k)s, and annuities. But what about a Section 7702 Plan? If you haven’t heard of it, you’re not alone. Yet for many high-income earners and long-term planners looking to diversify their tax exposure and create streams of tax-free income in retirement, a 7702 plan can be one of the most powerful tools available.

So let me ask you this: Do you have a 7702 Plan in your retirement portfolio? If not, it might be time to consider what you could be missing. We would like to manage your 7702 Plan! 

What Is a Section 7702 Plan?

A “Section 7702 plan,” in the context of financial planning, refers to a specially structured life insurance policy that adheres to the requirements of Internal Revenue Code Section 7702. This IRS code section defines what constitutes a life insurance contract for federal tax purposes, providing important guidelines that ensure policies qualify for:

  • Tax-deferred growth of cash value
  • Tax-free death benefits to beneficiaries
  • Tax-free income access if structured and used properly

While it’s not a retirement account in the traditional sense, it can be used as a strategic piece of a broader retirement plan.

Let’s break down what makes a 7702 plan unique and powerful.

Key Benefits of a 7702 Plan

1. Tax-Advantaged Growth

The cash value in a 7702-compliant life insurance policy grows on a tax-deferred basis. This means you won’t pay taxes on any earnings or interest accumulation as long as the funds remain inside the policy.

2. Tax-Free Death Benefit

If structured properly, the life insurance death benefit is paid to your beneficiaries income-tax free. This provides both a legacy benefit and peace of mind that your loved ones are protected.

3. Compliance with IRS Requirements

Section 7702 lays out two primary tests to determine whether a policy qualifies:

  • Cash Value Accumulation Test (CVAT)
  • Guideline Premium and Corridor Test (GPT)

Each of these ensures that the policy remains within defined limits of death benefit versus premium, so it doesn’t become a taxable investment vehicle.

4. Not Technically a Retirement Plan

While used within retirement strategies, a 7702 plan is not officially a retirement account like a 401(k). Instead, it’s an insurance-based strategy that complements other planning tools.

5. Tax Diversification

By adding a 7702 plan, you create access to a tax-free income stream in retirement, reducing your reliance on traditional taxable or tax-deferred accounts. This helps you better manage your future tax brackets.

How Does a 7702 Plan Work?

Here’s how the structure functions:

1. Permanent Life Insurance as the Base

Section 7702 plans are built using permanent life insurance policies, such as:

  • Whole Life
  • Universal Life
  • Indexed Universal Life (IUL)

These policies build cash value over time.

2. Premium Payments

Premiums fund both the cost of insurance and the accumulation of cash value. A portion goes toward mortality charges, while the remainder is allocated to your policy’s investment or crediting options.

3. Cash Value Growth

  • Grows tax-deferred
  • Can be allocated between fixed accounts or market indexes (in the case of IULs)
  • Is protected from market downside risk when using fixed or indexed strategies

4. Access to Cash Value

You can access your cash value via:

  • Withdrawals (tax-free up to your basis in the policy)
  • Policy loans (potentially tax-free as long as the policy stays in force)

Loans and withdrawals must be managed carefully to avoid policy lapse or tax consequences.

5. Our SMART IUL index allocation for your 7702 Plan (Call us at 1-888-814-0304 to learn how we set-up your 7702 Plan where your account value will never retreat, it will only advance!) 

  • Fixed Account Growth to cover the cost of life insurance each year of the policy, GUARANTEED!
  • Market Index linking to generate market-like gains without financial market risk

Real-Life Example: Mark’s Smart Decision

Let’s take a look at a real-world example:

Mark, a 33-year-old married father of three children under the age of 5, owns a successful small business and earns over $500,000 per year. Mark is financially savvy—he maxes out his SEP IRA with $69,000 annually, invests in commercial real estate, and stays active in the stock market.

But Mark realizes he needs life insurance coverage to protect his family. He considers a 20-year term life policy for $350/month, which would give him basic coverage for $2 million.

Instead, Mark chooses to fund a Section 7702 Plan through an Indexed Universal Life (IUL) policy. He contributes $2,000 per month in after-tax dollars to a policy with an A-rated carrier. The plan provides him with:

  • A $2 million death benefit
  • Market-like growth without market risk
  • Tax-free access to his cash value in retirement

According to projections:

  • At age 67, he will be able to withdraw $130,179/year tax-free
  • By age 80, the cash value of the policy is estimated to equal $3,382,630 with cumulative withdrawals from 14 consecutive years of withdrawals adding up to $1,172,67! That’s a lot of tax-free value for just $2,000/month invested for 20 consecutive years!

How is that possible?

Mark’s policy uses a strategic allocation:

  • 25% of his cash value earns a 4.75% fixed annual rate, covering the insurance costs even in a down market year
  • 75% of the cash value is indexed to a conservative strategy earning an average of 6.48% annually

Because of this design, his cash value never retreats due to market losses—it only advances.

This setup provides liquidity, legacy protection, and future tax-free income—all critical benefits for a high-earner like Mark.

Why More High-Income Earners Are Turning to 7702 Plans

If you’re a business owner, high-income professional, or investor in your peak earning years, you might be maxing out your tax-advantaged accounts already. So, what next?

7702 plans offer:

  • Unlimited contribution potential (subject to underwriting and insurance company limits)
  • Tax-free income in retirement
  • Asset protection in many states
  • Death benefit protection
  • No Required Minimum Distributions (RMDs)
  • No income phaseouts or contribution caps

That makes them ideal for:

  • Entrepreneurs
  • Surgeons, attorneys, and dentists
  • Real estate investors
  • Executives with limited Roth access

Important Considerations Before Opening a 7702 Plan

This strategy is not one-size-fits-all. Before starting your plan, you should:

1. Consult a Financial Advisor or Insurance Professional

These plans must be structured correctly to qualify under Section 7702. An experienced fiduciary can help tailor the design to your needs.

2. Understand the Policy Type and Features

Be clear on whether you’re choosing whole life, universal life, or IUL. Each has different guarantees, crediting strategies, and flexibility.

3. Know the Long-Term Commitment

These are not short-term products. A 7702 plan is a long-term commitment requiring years of funding to reap the full benefits.

4. Manage Loans and Withdrawals Carefully

Improper use of policy loans can trigger taxes or cause the policy to lapse. Always work with an advisor when taking distributions.

5. Understand the Fees and Cost of Insurance

Like all insurance, there are costs. But when properly structured, the long-term tax savings and growth potential often outweigh the internal fees.

Who Manages Your 7702 Plan?

Your 7702 Plan should be managed by an experienced, licensed professional who understands both the tax code and insurance strategy. As a Registered Social Security Analyst (RSSA), MBA, and fiduciary financial advisor, I help clients design 7702 plans tailored to:

  • Optimize tax-free retirement income
  • Protect their families with legacy-focused policies
  • Enhance overall financial independence

Take Action: Start Your 7702 Plan Today

If you’re serious about protecting your family, growing your assets without market risk, and enjoying tax-free income in retirement, now is the time to consider a Section 7702 Plan.

Let’s work together to see if a 7702 Plan fits into your financial future.

📞 Call our office at: 1-888-814-0304
📧 Email me directly at: ford@activewealth.com
🌐 Visit: retirementresults.com and activewealth.com

About the Author: Ford Stokes, RSSA, MBA

Ford Stokes is the Founder and President of Active Wealth Management and the host of the Retirement Results Radio Show. He is a fiduciary financial advisor, Series 65 licensed, and a Registered Social Security Analyst (RSSA).

Ford has helped thousands of pre-retirees and retirees gain financial confidence through personalized planning, smart investment strategies, and innovative insurance-based income solutions, including Section 7702 Plans.

He is also the author of multiple books including:

  • The Smart Retirement Plan
  • Annuity 360
  • Taxes Are on Sale

Through his work at Active Wealth, Ford helps families across America reduce risk, minimize taxes, and retire with greater peace of mind.