How is a 7702 plan different from a retirement plan?

A 7702 life insurance plan refers to a cash value life insurance policy that includes a death benefit and a cash value component that meets IRS standards. While these policies can provide supplemental income in retirement, they are not the same as retirement plans like 401(k)s or IRAs. Cash value life insurance policies often come with higher fees and charges, while 401(k)s and IRAs typically have lower fees and are specifically designed for retirement savings. It’s important to understand the costs and benefits of each option when planning for retirement.

What is the purpose of life insurance?

The primary purpose of life insurance is to provide financial support to your loved ones after your death. They might have to settle outstanding debts, like personal loans, pay for funeral costs and cover everyday living expenses without the help of your income. As a result, loved ones often struggle financially after a death in the family. Life insurance is designed to help alleviate some of that stress. The money provided by a life insurance payout is typically tax-free and can be used however the beneficiaries choose.

What is a Modified Endowment Contract (MEC)?

A Modified Endowment Contract, often simply referred to as a MEC, is a type of life insurance policy that fails to meet the criteria set by Section 7702. When a policy is classified as an MEC, it loses some of its tax advantages, such as tax-free loans and withdrawals. The earnings on a MEC are taxed as ordinary income when withdrawn, making it less favorable for those looking to use the policy as a tax-advantaged investment vehicle.

What is the difference between the guideline premium test (GPT) and cash value accumulation test (CVAT)?

Both the GPT and CVAT are two tests for a policy outlined in the Section 7702 IRS tax code. CVAT establishes that if a policyholder decides to surrender or cancel their policy, the money they receive from the cancellation cannot exceed the premiums they would have paid into it in one lump sum. GPT is used when the policyholder wants to maximize the amount of cash the policy accumulates. Whereas the CVAT focuses on maximizing the death benefit, the GPT focuses on the cash accumulation portion of a life insurance policy.

Is the Section 7702 rule good or bad?

Whether the 7702 rule is good or bad is relative, but for most people, Section 7702 will not be a concern. It’s only a concern if you are trying to put as much money as possible into your life insurance policy. The general goal of life insurance is to pay for funeral costs and alleviate your loved ones of any current or future debt the loss of your income may impact. If you are financially secure enough to pay more into a life insurance plan in order to take advantage of the tax-free advantages it provides, it might be a good thing. But if money is a concern, experts recommend focusing on what you and your family genuinely need and working with a trusted agent or financial consultant to accomplish your goals.

Understanding Section 7702 plans

Written by

Ashlyn Brooks,

Edited by

Natasha Cornelius, CLU,

Reviewed by

Tony Steuer,

Expert verified

Published on July 09, 2025 | 5 min read

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Key takeaways

Section 7702 of the IRS tax code outlines the criteria that life insurance policies must meet to qualify for tax advantages.
The term “7702 plan” is a loose marketing term, not a specific type of life insurance policy. It typically refers to the tax treatment of cash value life insurance policies, which can include whole, universal, variable or indexed policies.
If a life insurance policy does not meet the guidelines specified in Section 7702, the proceeds may be taxable as ordinary income.

Some life insurance polices enjoy tax advantages, but they must meet specific IRS guidelines first. Specifically, permanent life insurance coverage that adheres to Section 7702 of the tax code won’t be treated as taxable income. If your policy doesn’t meet tax code standards, it may be treated as a Modified Endowment Contract (MEC) investment and taxed accordingly. Bankrate’s insurance team explains the Section 7702 guidelines so you can better understand your policy’s cash value and tax status.

What is Section 7702?

While often referred to as a “7702 plan,” this term is more of a marketing concept rather than an actual insurance policy type. Section 7702 of the IRS tax code defines the criteria that cash value life insurance policies must meet to qualify for tax advantages. There are two main types of life insurance: permanent life insurance. Only permanent life insurance policies, such as whole life and universal life, can accumulate cash value. Section 7702 applies specifically to these cash value policies.

The tax code sets out multiple tests that these policies must pass to retain their tax-advantaged status: the Cash Value Accumulation Test (CVAT) and the Guideline Premium and Corridor Test (GPT). If a life insurance policy does not meet these criteria, its proceeds may be taxed as ordinary income. Understanding Section 7702 helps policyholders know how their policy’s cash value can grow and what tax advantages might be available. While these policies are not retirement plans, policyholders can typically borrow against the cash value or make withdrawals for various purposes, including retirement. However, it’s important to understand the rules and potential tax implications of such withdrawals.

What is a cash value accumulation test (CVAT)?

The CVAT is one of the tests defined in future premiums at once.

For example, if you have a $200,000 life insurance policy with a $20,000 cash value, the net single payment must be more than $20,000. If it would only cost $18,000 to pay for all future benefits upfront, your policy will not pass the IRS’s CVAT. In this case, it may not qualify for the tax advantages life insurance policies usually receive.

Policies that typically use the CVAT include whole life insurance. These policies accumulate cash value over time, and the CVAT ensures this cash value remains within the limits set by the IRS. By meeting this test, policyholders can benefit from the tax advantages associated with genuine life insurance policies.

What is a guideline premium and corridor test (GPT)?

The GPT is a two-part test defined in Section 7702 to determine if a life insurance policy qualifies for tax advantages.

Guideline premium test: This part of the test limits the amount of premiums that can be paid into the policy at any given time. The limit can vary based on the insurance company’s expenses and claims experience. Essentially, it ensures that the policyholder doesn’t pay more into the policy than necessary for it to be considered life insurance.
Corridor test: This part of the test requires that the policy’s death benefit always exceeds a specified multiple of its cash value. This multiple can vary based on the insured individual’s age. If the cash value exceeds this corridor, the policy is determined to be overfunded and is classified as an MEC. The corridor narrows as you get older, which allows for the policies to endow at maturity.

Policies that often use the GPT include universal life insurance. These policies allow for flexible premiums and have the potential to accumulate cash value. The GPT ensures that the policy remains within the limits set by the IRS, maintaining its status as a life insurance policy with associated tax advantages.

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Why is Section 7702 important?

Section 7702 is a crucial part of the IRS tax code because it defines which death benefit may be taxable as ordinary income. Fortunately, most life insurance policies today comply with these rules, so policyholders typically don’t need to worry about losing their tax benefits.

The origin of Section 7702 dates back to concerns about tax avoidance. In the early days of life insurance in the U.S., policies were designed to support widows and children without imposing tax burdens on them. By 1984, however, some wealthy individuals were exploiting these tax-free benefits by using life insurance policies as investment vehicles rather than for their intended purpose of providing financial protection. To address this, Congress introduced Section 7702, establishing specific criteria that life insurance policies must meet to maintain their tax-advantaged status. This ensures that life insurance is used appropriately and prevents its misuse as a tax shelter.

How Section 7702 plans work

There isn’t a specific “Section 7702 plan.” Instead, Section 7702 refers to the IRS guidelines that life insurance policies must meet to maintain their tax-advantaged status. These guidelines apply to various types of cash value life insurance policies, such as whole life, universal life, variable universal life and indexed universal life.

Here is how these policies typically work:

Cash value accumulation: The cash value of the policy accumulates over time based on the premiums paid and any potential investment returns, dividends or interest credited to the policy.
Tax-deferred growth: The cash value grows on a tax-deferred basis, meaning you do not have to pay taxes on the growth as long as it remains within the Section 7702 guidelines. Since tax codes can change, it is recommended to work closely with your agent to stay informed.
Death benefit: This is the amount paid to beneficiaries upon the insured’s death. Under Section 7702, the death benefit is usually tax-free.
Access to cash value: Policy owners can access the cash value through withdrawals or policy loans. Withdrawals are typically tax-free up to the amount of premiums paid (the owner’s basis). Policy loans are also generally tax-free as long as the policy remains active, but they accrue interest, which can impact the policy’s cash value and death benefit.

The amount of cash value that accumulates inside the policy depends on the type of policy and the amount paid into it over time. Variable policies have the potential for higher growth in the long run but can also decline in value when markets drop. Indexed universal life policies tend to be safer because the policyholder’s cash value is guaranteed not to decrease if the associated index performs poorly. However, there are trade-offs in your potential return. They usually have lower long-term growth potential compared to variable policies.

Frequently asked questions

A 7702 life insurance plan refers to a cash value life insurance policy that includes a death benefit and a cash value component that meets IRS standards. While these policies can provide supplemental income in retirement, they are not the same as retirement plans like 401(k)s or IRAs. Cash value life insurance policies often come with higher fees and charges, while 401(k)s and IRAs typically have lower fees and are specifically designed for retirement savings. It’s important to understand the costs and benefits of each option when planning for retirement.
The primary purpose of life insurance is to provide financial support to your loved ones after your death. They might have to settle outstanding debts, like personal loans, pay for funeral costs and cover everyday living expenses without the help of your income. As a result, loved ones often struggle financially after a death in the family. Life insurance is designed to help alleviate some of that stress. The money provided by a life insurance payout is typically tax-free and can be used however the beneficiaries choose.
A Modified Endowment Contract, often simply referred to as a MEC, is a type of life insurance policy that fails to meet the criteria set by Section 7702. When a policy is classified as an MEC, it loses some of its tax advantages, such as tax-free loans and withdrawals. The earnings on a MEC are taxed as ordinary income when withdrawn, making it less favorable for those looking to use the policy as a tax-advantaged investment vehicle.
Both the GPT and CVAT are two tests for a policy outlined in the Section 7702 IRS tax code. CVAT establishes that if a policyholder decides to surrender or cancel their policy, the money they receive from the cancellation cannot exceed the premiums they would have paid into it in one lump sum. GPT is used when the policyholder wants to maximize the amount of cash the policy accumulates. Whereas the CVAT focuses on maximizing the death benefit, the GPT focuses on the cash accumulation portion of a life insurance policy.
Whether the 7702 rule is good or bad is relative, but for most people, Section 7702 will not be a concern. It’s only a concern if you are trying to put as much money as possible into your life insurance policy. The general goal of life insurance is to pay for funeral costs and alleviate your loved ones of any current or future debt the loss of your income may impact. If you are financially secure enough to pay more into a life insurance plan in order to take advantage of the tax-free advantages it provides, it might be a good thing. But if money is a concern, experts recommend focusing on what you and your family genuinely need and working with a trusted agent or financial consultant to accomplish your goals.