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. The goal is usually to 'overfund' the life insurance, to the point where the policy value can later be borrowed from to fund retirement costs.

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.

Money when you need it

A typical insurance contract allows you to borrow from the cash value of the account. In a 7702 scheme, the plan includes borrowing. Just be aware there an unknowable interest cost involved: the insurance company may charge you 4% to 6% of the borrowed amount. For comparison with an IRA you can take your own contributions back out with no fees whatsoever, and you have access to money for education expenses and homebuying, in addition to unrestricted access at retirement age.

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