Editors' pick: Originally published March 7.
Can a kind of life insurance policy peddled as a 702 retirement account be a key part of your long-term financial plan? Depending on who you talk to and your current situation, the answer could be affirmative or negative.
702 retirement accounts are named after the section of the tax code that regulates life insurance. And, in fact, a 702 retirement plan -- it also may be called a 7702 or 702(j) plan -- is a life insurance policy.
702 accounts are a type of insurance called whole life. Unlike a term life policy that runs for a specific period such as 10 or 20 years, whole life provides a death benefit for the insured's full lifespan. The entire premium for a term life policy pays for the death benefit. It is generally the least expensive life insurance for a given benefit.
Only part of a whole life policy premium pays for insurance. The rest accumulates to build up cash value. A 702-type plan is tailored to maximize cash buildup rather than insurance benefit.
Premiums for whole life are higher than for a term life policy with a similar-sized death benefit. However, if a term life policy expires or lapses before the insured dies, there is no financial benefit to the insured.
A whole life policy's cash value lets the insured get some benefit from the premiums while still alive. The insurance company invests the cash value. And, like tax-advantaged accounts like IRAs and 401ks, growth is free of federal income taxes.