Unlock the Hidden Secrets of the IRS and the Super Wealthy – IRS Section 7702

IRS Tax Section 7702, the hidden secret of the IRS and the super wealthy.

The hidden secrets of IRS Section 7702 are that life insurance, when designed properly, will not only provide your heirs incredible wealth but it will provide YOU wealth while you are alive.

But, you will need a trusted, knowledgeable and skilled advisor to help you understand how to design a policy to take maximum advantage of the tax favorable, oops, we mean TAX-FREE, wealth-building vehicles.

Multiple Life Insurance Vehicles, Which One to Choose?

One important premise behind a life insurance wealth-building strategy is that the policy must be a permanent policy.

There are two main flavors of permanent life insurance;

  • Traditional Whole Life Policies (Participating Whole Life Policies)
  • Indexed Universal Life Policies

First of all, let’s clear the air and understand that a LIRP, life insurance retirement program (or what I simply call life retirement), is LIFE INSURANCE first and a wealth-building vehicle secondarily.

That simply means if you are looking to build wealth using a life insurance vehicle should have an underlying need for a death benefit, or at the very least you must be willing to commit to the expense of life insurance in exchange for wealth building benefits. Otherwise, incurring the cost of life insurance without a need for a death benefit is, generally speaking, not wise.

IF you have a need for a death benefit (life insurance) and IF you have a concern about or a need for retirement income planning and funding, then a LIRP is certainly something you.

Vehicle Number 1 – Participating Whole Life

Okay, this is the old-school conservative strategy and policy that can help accumulate wealth. Many authority figures, like Dave Ramsey, are staunch opponents of whole life policies for building wealth. In many (most) regards, Mr. Ramsey is correct however there are cases when whole life is a great choice for wealth building. The single most important factor when choosing a whole life policy is choosing the right company and policy!

If you are looking into whole life policies for death benefit AND wealth building, please keep you eye on mutual companies with participating whole life policies (dividend paying whole life policies). Make sure, also, that your candidates have a lengthy history of producing dividends – producing dividends even through financial downturns (i.e. Mass Mutual and Foresters are very sound starting points).

Building wealth with whole life can be (is) a long game, the cost of insurance may be prohibitive for the first 10-20 years but there are special demographics (age and health conditions) that the right participating whole life policy configured the right way is a solid choice for a LIRP. There are also specialized tactics that will help supercharge your cash value accumulation.

Vehicle Number 2 – Indexed Universal Life

Vehicle number 2 is an Indexed Universal Life policy (IUL). Universal life consists of an annually renewable term policy and a side cash account that earns interest based upon the choice of an equity index, like the S&P.

IUL’s are structured with a floor (minimum rate of return, usually 0% but a few policies offer a higher floor) and a cap (maximum rate of return). Cap rates can be substantial, substantial enough to provide relief to the weighted average rate of return even in consecutive years of down markets like 2001/2 and 2007/8.

IUL’s also offer a greater level of flexibility and diversity throughout the life of a policy as opposed to a whole life policy.

Remember, also, for 7702 eligibility a policy must be permanent so for this reason, in an IUL you must commit to eternally purchasing the ever increasing cost of term insurance.

This is can be very risky, obviously, and one of the main reasons why it is recommended you have a trusted, knowledgeable and experienced advisor to help you select and design your policy.

Now, assuming you have that trusted advisor, because of policy flexibility, indexed crediting rates, tax-favorable treatment (Tax-Free gains) and other policy design and illustration best practices, an IUL is a winning option vs. whole life. The advantage of an IUL over whole life is orders of magnitudes better the younger you are and the healthier you are.

Please do read this article for a breakdown of age and health recommendations for IUL’s vs Whole Life.

Why are LIRP’s a Hidden Secret of the IRS and Super Wealthy?

IRS code 7702 is extensive and we are not here to talk about tax codes. We are also not here to talk about politics, but politics are indeed (at least) partially responsible for these tax codes

The political question is important because when we ask the obvious question – WHY WOULD THE IRS CREATE A CODE/SECTION WITH SUCH AN EXTREME ADVANTAGE TO THE CITIZENRY? Much of that answer is political (yet, once again, outside of the scope of this conversation) but now we have laid the groundwork for the rest of the story.

In the late 1970s/early 1980s, the government figured out people were using life insurance policies as tax shelters. Political pressure and deficit spending required (i.e. growing national deficit and debt) forced the hand of Uncle Sam to put a leash on life insurance cash accumulation policies.

The government rewrote the tax code—Sec. 7702—so that you had to spread out the maximum amount of dollars you wanted to place in a policy. The quickest you can fund a permanent life insurance policy and still comply with the 7702 and have tax favorability, is seven years.

If you “MEC” an insurance policy, it means that you have put too much money in too quickly. (This is why you want to be very careful and not accidentally MEC a policy). Wealthy people don’t MEC!!

Sec. 7702 restricts the side cash account funding and how quickly the funds can be placed in the permanent life insurance contract. The annual restriction is not limited to a specified amount, like with the IRA, 401(k) or other plans.

What the IRS does do is restricts the funding of the side cash account so that a person can proportional to the death benefit, not any given absolute amount.

Herein lies one of the hidden secrets of the super-wealthy. They understand the long game (7 years), accept the long game and have learned how to exploit the long game. Life insurance wealth-building is NOT a get rich quick strategy, it’s a long play – but after 20-30 years the tax favorable treatment more than makes up the difference for the first 7+ years of being underwater.

Oh, and did we fail to mention – there is a nice little bonus built into these policies – DEATH BENEFIT FOR YOUR HEIRS. Once again, generational wealth-building – BUT – also wealth-building for YOU while you are still alive.

The Next Hidden Secret – Tax Favorable Distributions

There are two basic ways that you can take distributions on a permanent life insurance policy. Visualize the IUL policy as a bucket that can hold money. Your age, sex, health condition, and the size of the death benefit are all factors that determine the amount of money the bucket can hold. The IRS Sec. 7702 makes the rules we must follow to determine the size of a bucket and how quickly you can fill it.

When you place money into a policy, you are filling up the bucket towards its maximum limit. Once the maximum limit is met, you cannot put any more money in a policy unless you increase the death benefit or have some other “material change.”

At some point in time, preferably when the bucket is maximum efficiency, you can take money out of it. What is nice about a permanent life contract is you can pick and choose when, and how frequently, you want to take distributions. This makes this financial product one of the most flexible accumulation products available on the market.

The Next Benefit of a LIRP

In order to maintain the tax favorable (aka TAX-FREE) status of the policy and distributions, you must take funds from the policy in the form of loans, loans that you do not have to pay back and loans that will earn you more money!

NOW, this is yet another fairly complex component of a LIRP where you must have a trusted advisor, there are loan arbitrage opportunities during up-markets as well as guarantees to mitigate risks during down-markets. They key here is to have a flexible enough policy and skilled enough advisor to be able to hit the gas during up-markets and apply the brakes during down-markets.

Yet, Another LIRP Benefit

Yes, this is the last benefit (for now). Because of the tax-free nature of the distributions (loans) from the policy, this income is not required to be reported as taxable income as opposed to alternative retirement income (i.e. IRA, 401K, etc.) that is reported as taxable income.

This benefit, while valuable for the super-wealthy is even more valuable for the average retiree. Having retirement income that is not reported as taxable income allows retirees to keep your social security benefits under taxable thresholds. Having tax free income will also prevent triggering the 3.8% medicare surtax for higher incomes.

Is a LIRP (IUL) for You?

I will once again refer back the statement at the beginning of this page;


First of all, let’s clear the air and understand that a LIRP, life insurance retirement program (or what I simply call life retirement), is LIFE INSURANCE first and a wealth-building vehicle second.

That simply means if you are looking to build wealth using a life insurance vehicle should have an underlying need for a death benefit, or at the very least you must be willing to commit to the expense of life insurance in exchange for wealth building benefits. Otherwise, incurring the cost of life insurance without a need for a death benefit is, generally speaking, not wise.

IF you have a need for a death benefit (life insurance) and IF you have a concern about or a need for retirement income planning and funding, then a LIRP is certainly something you.


If you are young enough (subjective statement) and healthy enough to have an advantageous life insurance health class rating – AND – you have a need for a death benefit (i.e. spouse, kids, mortgaged real estate, income replacement, etc.) and a need (desire) to build wealth, then I would highly recommend you investigate further the LIRP landscape.

Of COURSE, I would love an opportunity to speak with you and listen to your needs as an advisor and provide for you more information, guidance, recommendations – then – hopefully an opportunity to execute and help you build a legacy, nest egg, retirement income and generational wealth.

LASTLY – If you have read this far you probably recall seeing the word HEALTHY many times. Healthy in life insurance speak (underwriting terms) includes non-smokers while excluding smokers. I have run enough illustrations to steadfastly say (insist) that IF you are seriously interested in a LIRP and IF you are a smoker – PLEASE – do you a favor, your family a favor and your heirs a favor and quit smoking TODAY. Smoking rates (health classes) will erode and eliminate large portions of the wealth (while transferring that wealth to the insurance companies). I would even go to the extreme of recommending that you quit smoking today and postpone an IUL application until you can pass an exam as tobacco-free (one year).

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