What does the IRS tax code 7702 mean?
Section 7702(a) provides that, for a contract to qualify as a life insurance contract for Federal income tax purposes, the contract must be a life insurance contract under the applicable law and must either (1) satisfy the cash value accumulation test of § 7702(b), or (2) both meet the guideline premium requirements of …
When did 7702 start?
What is IRC Section 7702 and 7702A? IRC Section 7702 sets forth tests to define whether a life insurance contract may be treated as a life insurance contract for federal tax purposes. Implemented in 1984, the tests were enacted to limit the investment orientation of a life insurance policy.
What section 7702 changes mean for life insurance?
THE 7702 CHANGE Life insurance policies that don’t meet the criteria are not considered “life insurance” under the tax code. As a result, any cash value gain in the policy would be subject to immediate ordinary income taxation on a yearly basis, regardless of whether or not you withdraw it from your policy.
Is TFRA a life insurance?
TEFRA: The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 provided a statutory definition of life insurance for flexible premium (i.e., Universal Life) products that limited the amount of premium per dollar of death benefit and required at least a minimum amount of pure risk coverage in order to be treated as …
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.
When a life insurance policy exceeds certain IRS table values the result would create?
L’s spouse dies at age 66. When a life insurance policy exceeds certain IRS table values, the result would create which of the following? When a life insurance policy exceeds certain IRS table values, the result would create a Modified Endowment Contract (MEC).
What is guideline premium?
Guideline Premium — a premium that is defined in universal life insurance policies as the maximum premium payable that will qualify the policy as life insurance for federal income tax purposes.
What is a modified endowment contract in insurance?
A modified endowment contract (MEC) is a cash value life insurance policy that gets stripped of many tax benefits. The seven-pay test determines if the policy qualifies as an MEC. MECs ended a popular way to shelter money from taxes by borrowing from insurance policies whose cash value grew too quickly.
What happens if a life insurance policy fails the 7 pay test?
It is possible that a contract that requires seven level annual premiums will fail the 7-pay test because the statutory net level premium will be less than the actual premium paid. Once a policy has failed the 7-pay test, it becomes a MEC and remains a MEC for the life of the contract.
Is TFRA a good investment?
A TFRA can also offer greater liquidity since you can access cash value as needed without triggering any type of tax penalty. Tax-free retirement accounts can also be useful for generating an additional stream of income for retirement.
What are the qualifications for a TFRA?
A TFRA is a long-term investment plan. At a minimum, you must be able to fund the plan for three to seven years and allow it to grow for seven to 10 years before you plan to access the income stream.
What is section 7702 of the US Code?
26 U.S. Code § 7702 – Life insurance contract defined. If there is a change in the benefits under (or in other terms of) the contract which was not reflected in any previous determination or adjustment made under this section, there shall be proper adjustments in future determinations made under this section.
What is a section 7702 life insurance contract?
As a result of Section 7702, there are now three classes of “life insurance” contracts: A policy that doesn’t meet the requirements of 7702 isn’t life insurance at all for federal tax purposes. As such, these types of policies aren’t generally available for purchase.
What is an endowment contract under US Code 7702?
26 U.S. Code § 7702 – Life insurance contract defined. For purposes of this title (other than paragraph (1)), the term “ endowment contract ” means a contract which is an endowment contract under the applicable law and which meets the requirements of subsection (a).
Are flexible premium contracts subject to IRS code 7702?
“Any flexible premium contract issued during 1984 which meets the requirements of section 7702 of the Internal Revenue Code of 1954 [now 1986] (as added by this section) shall be treated as meeting the requirements of section 101 (f) of such Code.” The following state regulations pages link to this page.