The class of policies known as 702 accounts have been widely touted as retirement vehicles over the last few decades. They are also known as 7702 accounts, because they are based on a section of the Internal Revenue Code, in this case section 7702. Other names are 770 or 702(j) accounts.
The name tends to make people think of 702 accounts as savings accounts, similarly to 529 and 401(k) plans, and they are often promoted that way. The accounts offer a guaranteed, tax-free return of up to 60 times a standard bank savings account.
But 702 accounts are actually a type of life insurance policy, and section 7702 of the tax code is one that governs life insurance contracts. They are a type of policy called permanent life or whole life insurance policies, because they provide coverage for the remainder of the policyholder’s life.
They also have a cash account. You pay more in premiums than is needed to maintain the insurance, and the excess goes into the cash account. The funds in the account are invested and grow with time. You can borrow from the account tax-free, and the loans do not have to be paid back during the policyholder’s lifetime. They are paid back from the policy’s death benefit.
Many people promoting 702 accounts point to their tax advantages. Additionally, they are a way of saving money for retirement or another long-range goal and generating tax-free income. Like IRAs, the cash balances are sheltered from bankruptcy proceedings and lawsuits. And, unlike IRAs and 401(k)s, you are guaranteed not to lose your principal with a 702 account. Those are main reasons why many people are attracted to these accounts.
But there are some disadvantages:
As retirement savings vehicles, 702 accounts also have some drawbacks compared to other retirement savings methods:
Life insurance is a crucial component of a well-rounded financial plan. But it’s important to keep sight of the purpose of each component. Life insurance policies are not primarily investment or savings vehicles. Permanent life policies like 702 accounts might well be suitable for you, but you will want to carefully consider all your options.