The 7702 Plan

The 7702 Plan

There are two things that all clients are thinking about during these times. The first is their own mortality in an uncertain, pandemic world. The second are their taxes and how a changing administration and unprecedented federal stimulus will most certainly change them in the future. There was a relatively unheard of gift that happened at the beginning of 2021 that has been the “shot in the arm” that we may all have needed, and it wasn’t a Covid vaccine. 

At the end of December, 2020, The Consolidated Appropriations Act, 2021, was signed by then President Trump. This was the second largest stimulus bill aimed at relieving Americans impacted by the pandemic. Near the end of the more than 2100 page bill, was a change in IRC Sec. 7702, the definition of life insurance. 7702 dictates how much premium is allowed into a life insurance contract while still being defined as life insurance, and not an investment, thus preserving its tax advantages. If more premium is paid in, using one of two tests (GPT or CVAT), then is allowed by the definition, the contract becomes a Modified Endowment Contract or MEC. MEC status strips a policy of its tax advantages while the insured is alive. 

The changes made by the Consolidated Appropriations Act, 2021, allow for a changing interest rate model for defining the minimum interest rates as opposed to the fixed interest rate model used before. These rates can now change based on the changes in market interest rates. In a prolonged, historically low interest rate environment, like we’ve been in for some time, it has been difficult for insurance companies to maintain profitability which has come at the expense of a policy’s performance. 

The new rules allow for more premium to be paid into the same policy without it becoming a MEC, thus increasing its overall performance. This is obviously good news for accumulation products such as accumulation IUL, but also just as good for protection products. For older clients (think those in their 70s), we can take the same 12 pay premium for a given face amount and apply it now in only 8 years. This allows the indexing to take hold quicker and reduces the drag effect from the mortality charges resulting in far more efficient policies for older clients. 

It’s not just older clients either. Impaired risk cases also will now have the ability to shine. As mentioned before, there is a reduction in the drag on a policy from the reduction of mortality charges associated with it due to a reduction in the net amount at risk to the insurance company increases the overall efficiency. We have the ability to now better attend to the financial needs of our clients using Index Universal Life, whether for protection or accumulation, even if they are aging or not in the best of health. We started this by saying that American’s mortality was more top of mind than ever, and this subgroup of the population has been at far greater risk for a year now, then ever before. Let’s go help secure their financial legacies and fulfil their protection goals. 

Circling back to the second concern on every clients mind now – taxes. There is some irony in the fact that the bill passed in December that gave us in the life insurance and financial planning business this gift, came in the form a stimulus bill that most all will agree will eventually increase our taxes. We’re not here to argue over the benefits vs. detriments of stimulus spending, but the reality is, we will need to eventually pay for our increased spending. Our political climate is changing and with a new administration and a new congress seated, people are feeling uncertain as to what to expect from a tax standpoint in the future. Life insurance has always had a unique standing in tax planning landscape, and now more than ever, we need to look at it as an alternative asset class. If you’re a financial planner or wealth manager, you likely have a formula you prefer. X amount goes into managed money, x amount into an annuity etc. But life insurance was always too expensive, right? 

With the changes that have been implemented to 7702, financial planners, RIA’s, wealth management firms, etc. will all need to take a second look at Index Universal Life. The changes that allow for a more efficient policy, will see a pickup in IRR by perhaps 50 basis points while still experiencing the tax advantaged growth. And, with 72% of Americans saying that they are reevaluating their savings plan and thinking about how to protect what they have from market volatility, what better way to help them do so then with a product designed to never have a negative return. We’ve all heard it called a Roth Alternative, or a Super Roth Alternative, now maybe it’s a Super Super Roth Alternative. Add in the living benefit riders to help cover expenses associated with long term care, and your fiduciary responsibility is covered. 

Whether it’s a Roth alternative, a 529 plan alternative, special needs advanced planning, or older and/or less healthy clients we’re trying to help, the changes to 7702 will allow us to better serve our clients. Couple this change with the elimination of being able to illustrate ridiculous bonuses and multipliers, which were never going to prove feasible, that AG 49a afforded us, and we are re-legitimizing our place in the planning process. Call us today so we can help prepare your next proposal.