Difference between revisions of "7702 private pension"

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(Formatted link, added notes section.)
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== What are they? ==
 
== What are they? ==
Section 7702 of the IRS code regulates life insurance contracts.  Thus a "7702 Private Pension" is simply a rebranding of a life insurance contract.  
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Section 7702 of the IRS code regulates life insurance contracts.  Thus a "7702 Private Pension" is simply a rebranding of a life insurance contract.  The goal is usually to 'overfund' the life insurance, to the point where it can later be borrowed to fund retirement.
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A 7702 can be seen as equivalent to an IRA, Roth or 401(k) plan, but invested in life insurance products.
  
 
== Is a 7702 right for me? ==
 
== Is a 7702 right for me? ==
A typical 7702 scheme skirts the legal minimums for death benefit and is sold not as life insurance, but as a retirement account. Such an 'overfunded' life insurance is a popular strategy among the ultra wealthy, as it allows sheltering far more income from taxes than otherwise allowed by law.  For those not in the 1%, however, the picture is far more murky.  With a 7702 plan you most forgo current tax breaks, and any offered employer contribution to your retirement.  The plans are almost impossible to compare among salespeople, and are quite complex.  Many assumptions are necessary to predict the performance of these plans, including speculation about future tax rates.  Such plans are always sold on commission.
 
  
The Boglehead's view of a 7702 is that it's yet another high cost investment option with unproven benefits.<ref group="footnotes"> For example, see [http://www.bogleheads.org/forum/viewtopic.php?f=2&t=121253 Indexed Universal Life Insurance - Again ...].</ref>
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'Overfunded' life insurance has long been a popular strategy among the ultra wealthy, as it allows sheltering far more income from taxes than otherwise allowed by law.  For those not in the 1%, however, the picture is far more murky.  With a 7702 plan you most forgo current tax breaks, and any offered employer contribution to your retirement.  The plans are almost impossible to compare among salespeople, and are quite complex.  Many assumptions are necessary to predict the performance of these plans, including speculation about future tax rates.
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A typical Boglehead's view of a 7702 is that it's yet another high cost investment option with unproven benefits.
  
 
== Investments that never go down ==
 
== Investments that never go down ==
A typical 7702 plan pitch touts an investment that can go up, but never go down.  Rarely mentioned are the details of how this is done.  A typical plan works like this:
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A typical sales pitch for a 7702 plan includes investment that can go up, but never go down.  Rarely mentioned are the details of how this is done.  Such an indexing scheme typically works something like this:
  
 
* Take the price (but not the earnings) of a major index like the S&P 500.
 
* Take the price (but not the earnings) of a major index like the S&P 500.
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* In years when the price goes up, most of the increase is credited to the cash value.  But the amount is capped, typically at 10%.
 
* In years when the price goes up, most of the increase is credited to the cash value.  But the amount is capped, typically at 10%.
  
Thus for a hefty cut of the potential gains, the insurance company will smooth out the bumps of the stock market for you.  Over shorter periods of time, the insurance company may loose out big time.  Over long periods of time, the insurance company makes a large profit.
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Thus for a hefty cut of the potential gains, the insurance company will smooth out the bumps of the stock market for you.  Over shorter periods of time, the insurance company may loose out big time.  Over long periods of time, the insurance company makes a large profit.  A typical contract allows the insurance company to adjust the cap and participation rate at any time (even if that reduces your gains).  More details see the similar product described at [[Equity-indexed_annuity]].
  
 
==Notes==
 
==Notes==

Revision as of 02:55, 28 June 2014

What are they?

Section 7702 of the IRS code regulates life insurance contracts. Thus a "7702 Private Pension" is simply a rebranding of a life insurance contract. The goal is usually to 'overfund' the life insurance, to the point where it can later be borrowed to fund retirement.

A 7702 can be seen as equivalent to an IRA, Roth or 401(k) plan, but invested in life insurance products.

Is a 7702 right for me?

'Overfunded' life insurance has long been a popular strategy among the ultra wealthy, as it allows sheltering far more income from taxes than otherwise allowed by law. For those not in the 1%, however, the picture is far more murky. With a 7702 plan you most forgo current tax breaks, and any offered employer contribution to your retirement. The plans are almost impossible to compare among salespeople, and are quite complex. Many assumptions are necessary to predict the performance of these plans, including speculation about future tax rates.

A typical Boglehead's view of a 7702 is that it's yet another high cost investment option with unproven benefits.

Investments that never go down

A typical sales pitch for a 7702 plan includes investment that can go up, but never go down. Rarely mentioned are the details of how this is done. Such an indexing scheme typically works something like this:

  • Take the price (but not the earnings) of a major index like the S&P 500.
  • In years when the price goes down, $0 is credited to the cash value of the life insurance.
  • In years when the price goes up, most of the increase is credited to the cash value. But the amount is capped, typically at 10%.

Thus for a hefty cut of the potential gains, the insurance company will smooth out the bumps of the stock market for you. Over shorter periods of time, the insurance company may loose out big time. Over long periods of time, the insurance company makes a large profit. A typical contract allows the insurance company to adjust the cap and participation rate at any time (even if that reduces your gains). More details see the similar product described at Equity-indexed_annuity.

Notes


External links