7702 private pension

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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.

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 (for example see [1] ).

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:

  • 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.

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