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You probably don’t know what a 702(j) account is, but that’s okay. It’s one of those wacky marketing names you’ll be hard-pressed to find discussed in financial advice columns or retirement planning blogs.

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Some people believe it sounds technical and important, but it’s actually just a type of permanent life insurance policy that is regulated under section 7702 of the U.S. Code.

If you’re interested but a little confused, we’ll explain in detail.


What is a 702(j) Retirement Plan?


The 702(j) plan is actually two products in one: life insurance and a retirement plan. The life insurance provides individuals with coverage should they meet an untimely demise, and the retirement plan portion allows them to withdraw cash during their retirement years. Now, let’s get a little more specific.

A 702(j) is not a retirement plan but rather a life insurance product that can easily be designed and funded to provide a tax-exempt income stream for retirement.

But the truth of the matter is Section 702(j) that deals with investments does not exist. However, as most laws are housed within the United States Code, section 7702 deals with the tax treatment of insurance products.

The term, 702(j) Plan is a marketing term used by insurance professionals to indicate the purpose of a life insurance product and not the actual type of product. For example, if you buy “mortgage protection insurance,” nowhere on the insurance policy’s declaration page will you find the phrase “mortgage protection”.

To be clear, we don’t mean to imply that insurance professionals are misleading you about a life insurance product, but rather using the term to separate the usage of the product as an investment rather than a death benefit (although both are important).


How does a 702(j) Plan Work in Retirement Planning?


A 702(j) plan works in the same manner as a whole life or universal life policy works. The plan (life insurance) is purchased through an insurance broker or financial planner.

Unlike some traditional retirement plan products, you cannot set up a 702(j) plan at work, in your bank, or stockbroker.

Once you’ve set up the plan, you begin paying premiums to the insurance company in exchange for the insurance coverage. Your payments go toward the policy’s death benefit that’s paid to your beneficiary and the cash value of the policy.

Like most permanent life insurance products, your 702(j) plan has a cash component attached to it. This means a portion of your premiums paid will go towards the cost of life insurance and fees, and the remainder is placed in your cash-value account where it earns guaranteed interest that is credited to your account tax-deferred.

Over time, your cash value account will grow significantly and can be accessed via policy loans or withdrawals to be used for any reason and repaid in any manner you’d like since any outstanding loans will be deducted from the death benefit should you die before repayment.

And, there is no tax-liability since the money you withdraw is tax-exempt because it is a loan, not income.

Moreover, if your 702(j) plan is a participating whole life policy purchased from a mutual insurance company, you can earn dividends on top of your interest. We’ll talk a little more about dividends later.


What’s the Best Type of Life Insurance Policy for a 702(j) Plan?


First of all, Term life insurance is out of the question for two reasons:

  1. It provides temporary coverage.
  2. Term does not have a cash account attached to it.

So, that leaves Whole Life and Universal Life insurance. Although both would suffice, we recommend a whole life policy purchased from a mutual insurance company because if it’s a “participating” policy, you can expect to earn dividends from the insurance company since mutual insurance companies are responsible to their policyholders rather than stockholders.

It gets even better when you consider the paid-up additions option when dividends are paid.


What Are My Choices for Receiving Dividends?


When you are a participating whole life policyholder, you have several choices for receiving dividends from the insurance company.

  • You can request to receive your dividend payment in a check from the company.
  • You can request the insurance company to apply the dividend towards future premiums thereby reducing your cost of insurance going forward.
  • You can request that the company keep the dividends in an interest-bearing account.
  • And finally (and more importantly) you can direct the insurance company to use your dividends to purchase paid-up additions.

We believe that the “paid-up additions” is the best choice if you’re looking to build an income stream and here’s why:

  • The dividends are tax-exempt because they are considered a return of premiums paid and not income.
  • As the insurance company uses the dividends to purchase paid-up additions (PUAs), these paid-up additions create tiny paid-up policies that also earn tax-deferred interest.
  • Your whole life insurance policy which includes the paid-up additions will overfund your 702(j) plan which allows your plan to accumulate funds in your cash-value account much faster than if it was a non-participating policy.
  • The mini policies that are purchased with your dividends will also earn dividends which allows you to purchase more paid-up additions.
  • By increasing the amount of insurance coverage from the paid-up additions, the death benefit can increase as well.

It is because of the benefits mentioned above that we recommend a participating whole life policy over a Universal Life policy.


How will My 702(j) Plan Provide Retirement Income?


Let’s fast-forward to your retirement years when it’s time to start taking cash out of your 702(j) Plan.

First of all, you are not taking the cash out of your cash-value account when you borrow money from it. You are actually taking a loan from your insurance company and using your cash-value account as collateral.

This means that you do not have to qualify for the loan as long as it will not cause your policy to lapse (the insurance company will make sure that doesn’t happen) and you can pay it back or not pay it back because if you die with any outstanding loans, the insurer will simply reduce the death benefit to cover any outstanding loans.

Also, don’t forget that this income stream is not taxable thereby reducing your tax liability for all income streams you’ll receive from other retirement accounts.

Yes, you’ll pay interest to the insurance company but it’s normally less than what a traditional lender charges and in many cases less than the interest you’ll continue to earn on your insurance policy.

Remember, you’re not borrowing from your cash account, you’re borrowing from the insurance company. This means you will continue to earn interest and dividends on your cash-value account.


What are the Pros and Cons of a 702(j) Retirement Plan?


As with any financial planning, there are pros and cons to any investment product you choose. For example, the government has constraints on traditional investments for when you can withdraw money and when you must withdraw money.

Here are some pros and cons you should consider if you think participating whole life insurance should become an addition to your retirement portfolio:


A 702(j) plan can be a smart way to save for retirement, especially if you’re nervous about the tax consequences associated with traditional retirement accounts and Social Security income. You can also offset Medicare Part B premiums that may otherwise be high.
It offers you the benefits of tax diversification, which means you are not taxed as if it’s income. Instead, you are borrowing against the cash value of your policy.
Another benefit of permanent life insurance is that it can protect you against a negative sequence of returns. For example, if there is an economic downturn and investments are doing poorly, whole life insurance would allow you to withdraw cash out of your policy. This way, you won’t have to liquidate traditional investments or retirement funds just yet.
As with other cash value life insurance policies, your participating whole life insurance will be subject to fees and commissions which are included in your established periodic premium.
The death benefit can be significantly reduced if the policyholder dies before paying back loans against the policy.


In Conclusion

We believe it’s best to think of the 702(j) Plan as a long-term investment product rather than a life insurance policy that provides a death benefit for beneficiaries. Moreover, the plan should be just one of the components in your retirement planning.

The typical prospective policyholder is a moderate to a high-income earner who will likely max out other investment options because of governmental constraints or will have less retirement income access due to taxes.


For more information about using Whole Life Insurance as part of your retirement planning, contact us at (800) 595-1130 or contact us through our website 24/7 and we’ll get back to you to discuss your needs and goals.

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Curt Gibbs