What Is A 702(j) Retirement Income Plan?

by | Mar 28, 2023

When planning for retirement, having a plan that effectively manages your finances and maximizes the amount of future income you will receive is critical.

It is important to consider a 702(j) Retirement Income Plan to ensure financial stability during retirement.

This article provides an overview of what this plan entails, the potential benefits and advantages associated with such a plan, and key considerations related to establishing one.

As life changes affect our financial vision, understanding how accounts can help supplement retirement should be part of every person’s overall retirement strategy discussion.

The information provided here gives individuals insight into managing their money when considering retiring. It also provides peace of mind knowing that decisions made now can pay off later in life.

The Benefits Of A 702(J) Plan

The advantages of having a 702(j) plan for you will be contingent upon the problems you aim to tackle with your traditional retirement products.

Most people aiming to accumulate the wealth they need for their desired retirement lifestyle often face issues and complaints.

However, these can be avoided by using a 702(j) plan that incorporates indexed universal life insurance contracts.

  • You can withdraw cash anytime without having to pay taxes and penalties.
  • No annual cap on premium payments (contributions)
  • Your beneficiary can obtain a death benefit that won’t be liable for taxes.
  • No minimum distribution requirement at 72
  • Loans taken against the cash value for retirement income are not subject to taxation.
  • The policy’s cash account will be safeguarded due to the floor rate of the insurance policy, which is not allowed to go below zero, thus preventing it from suffering losses in a bear market.
  • You can take advantage of investment opportunities in the market without having to be actively involved by using a 702(j) plan.

The Disadvantages Of A 702(j) Plan

The suitability of a 702(j) plan for an individual will depend on their particular situation and desired retirement objectives. This was previously stated.

  • Your 702(j) plan is constructed using indexed universal life insurance with initial charges, including sales expenses and monthly service fees, that can influence the growth of your cash balance to some extent.
  • No other type of retirement plan provides an employer match as you get with a 401(k) plan.
  • A surrender fee is typically involved if you terminate or give up your policy before the designated time frame. This fee usually amounts to 10 years.
  • Contributions to a 401(k) or IRA are tax deductible, whereas premiums for other retirement savings plans are not.
  • When you pass away, the death benefit will be reduced by any loans.
  • If life insurance is funded too much, it might become a modified endowment contract, and any loans taken out against that policy may be taxable if not handled correctly.

702(J) Plans Vs. Iras And 401(K)S

Rather than using 702(j) plans, 401(k)s and Individual Retirement Accounts (IRAs) are more commonly employed to facilitate a retirement savings plan.

Regular contributions must be made into both of these accounts to establish a portfolio of investments generally composed of mutual funds or other types of securities.

Individuals can utilize these investment vehicles’ potential long-term growth opportunities by utilizing a 401(k) or IRA account for retirement savings.

A 401(k) plan is a retirement savings account sponsored by your employer, which often provides matching contributions up to a certain percentage of your salary.

On the other hand, an Individual Retirement Account (IRA) is opened and managed by you individually through a brokerage firm or financial institution.

In some cases, you may be able to get part of your 401(k) contributions matched by your company, depending on their policies.

Two types of 401(k) and IRA plans exist Roth and traditional. With a traditional plan, you contribute pre-tax money, which is then taxed when withdrawn in retirement.

On the other hand, you place post-tax funds into a Roth plan, allowing you to have a tax-free retirement income during your golden years.

Roth plans are a beneficial choice for individuals who anticipate their tax rate will be higher when they retire than it is now.

A 702(j) plan is not a retirement plan, even though some are trying to promote it as one. Although it does have the benefit of allowing you to take out money tax-free, you will still be charged interest on the loaned amount.

Who Can Get A 702(J) Program?

If retirement savings are your objective, a 702(j) plan is unsuitable. However, there are legitimate uses for life insurance policies, such as supplying financial help to your family upon death if you are their main income source.

If you believe a life insurance policy is needed, consult a financial advisor or an insurance company to determine the type of policy most beneficial for you and your family.

Be wary of any sales pitches that suggest paying more than the monthly premium can provide retirement funds; this is likely, not true.

A permanent life insurance contract can provide many tax code advantages that are not available through term life insurance, such as allowing the cash value to grow without being subject to taxation.

However, if a permanent life insurance policy is bought for its intended purpose, it will usually not be offered as a part of a 702(j) program.

What To Do Before Getting A 702(J)

It would be best to ask questions before committing and fully comprehend the fees and expenses associated with this plan.

Mish Schneider, trading research and education director at MarketGauge.com, strongly advises understanding the procedure before committing to it to ensure you are well informed about all aspects of the process.

When planning for retirement, it is important to take a comprehensive approach and prioritize financial planning before investing.

Fried suggests you “plan first and choose investments second” when considering your retirement strategy. You should review your 401(k) plan contributions, other investments, Social Security benefits you may receive, and any additional pension or retirement income.

Evaluating these factors will help you understand what resources are available to support your future lifestyle needs in retirement.

Are The 702(j) Plans Considered Scams?

Instead of being scams, 702(j) plans are legally allowed and may be beneficial if used properly without taking advantage of anyone.

Insurance sellers concentrate on marketing 702(j) plans to wealthy investors, even though they are not retirement savings plans.

Unfortunately, some insurance sales representatives have been deceiving consumers by offering these plans as a viable retirement option.

Many people turn to non-traditional retirement plans to boost their savings for later life.

This is because they have already invested the maximum amount allowed in traditional retirement vehicles such as 401(k)s and IRAs. Consequently, these individuals are searching for additional ways to save money for retirement.

Adding to your retirement savings may not be the most effective way through a 702(j) plan.

Understanding A 702(j) Retirement Income Plan

In conclusion, a 702(j) Retirement Income Plan is an individual retirement plan designed to help people achieve their financial goals.

It uses annuities purchased through a life insurance company to provide income throughout retirement.

Many advantages come with this type of investment, including tax-deferred growth, the potential for higher returns than traditional investments, and the ability to manage risk more effectively.

Additionally, those who select this option often have more control over asset allocation and withdrawal choices than they would have with other options, such as 401Ks or IRAs.

Ultimately, selecting a 702(j) is an important decision that requires careful consideration of all factors to make the right choice for your situation.


  • Scott Hall

    Scott realized about 5 years ago that he was woefully behind on retirement savings and needed to catch up. He began writing about it on Assets.net

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