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What is the IRS code 7702?
Section 7702 of the U.S. Internal Revenue Service (IRS) Tax Code defines what the federal government considers to be a legitimate life insurance contract and is used to determine how the proceeds are taxed. The proceeds of policies that do not meet the government’s definition are taxable as ordinary income.
What is the 702j plan?
A 702(j) plan is just a marketing term for a permanent life insurance policy governed by section 7702 of the U.S. Code. These types of insurance policies are not scams, but they are only appropriate for a small subset of people who are wealthy and have exhausted most other uses for their excess cash.
What happens if a life insurance policy fails to meet the federal statutory definition of life insurance?
This new definition controls the tax status of life insurance products.” If a life insurance contract fails to qualify under the definition, then the policyholder and the beneficiary are subject to federal income taxation on certain cash value accumula- tions and on death benefits paid. ‘
How does a modified endowment contract work?
A modified endowment contract (MEC) is a designation given to cash value life insurance contracts that have exceeded legal tax limits. When the IRS relabels your life insurance policy as an MEC, it removes the tax benefits of withdrawals you can make from the policy. You purchased the policy on or after June 20, 1988.
How long does the coverage normally remain on a limited pay life policy?
The short answer to How Long Does the Coverage normally remain on a limited pay life policy is usually until age 100 or until death.
What does Defra stand for in life insurance?
Deficit Reduction Act of 1984
The IRS believed it was important to differentiate between life insurance policies that were being used as traditional insurance or as investment vehicles, so they established the Deficit Reduction Act of 1984 (DEFRA).
What is an Iul investment?
Indexed universal life insurance, or IUL, is a type of universal life insurance. Rather than growing based on a fixed interest rate, it’s tied to the performance of a market index, like the S&P 500. Unlike investing directly in an index fund, however, you won’t lose money when the market has a downturn.
What is the 7-pay test for life insurance?
The 7-pay test examines the cumulative amount paid under a contract during the first seven policy years. This amount is compared to the sum of the net level premiums that would have been paid on a guaranteed seven-year pay whole life policy providing the same death benefit.
What is minimum death benefit factor?
In general, the minimum death benefit is equal to the minimum death benefit factor for the age of the Insured multiplied by the policy value on the date of death of the Insured. At the time a Policy is purchased, a policyholder can choose to include the Rider as part of his or her Policy.
Is a modified endowment contract good?
If your main financial goal is to pass on the most tax-free wealth possible to your family, a Modified Endowment Contract can be a great estate planning tool. Compared to other savings vehicles like CDs or money market accounts, MECs typically earn a higher interest rate.
How do you avoid a modified endowment contract?
To avoid being declared a modified endowment contract, a life insurance policy must meet the “7-pay” test. This test calculates the annual premium a life insurance policy would need to be paid up after seven level annual premiums. (When a life insurance policy is “paid up,” no further premiums are due.)