7702 Whole Life Insurance Updates
Are you considering whole life insurance, but want to know more about the new products the life insurance companies have released in response to the 7702 Whole Life Insurance updates in 2021?
The new products are here. What does the 7702 tax code mean for whole life insurance?
Tune in now to get the need-to-know information so you can see what to expect for new Infinite Banking policies.
Table of contents
What are the 7702 Whole Life Insurance Updates?
If you’re scratching your head when you hear 7702, don’t worry. This simply refers to a section in the IRS tax law that dictates the tax treatment of whole life insurance. At the end of 2020, this tax law was updated.
While some have voiced concerns over how this will affect future life insurance policies, we’re more optimistic. You can read our initial analysis of the 7702 whole life insurance updates in our post, Is Infinite Banking Dead?
Fortunately, we’re now seeing actual life insurance illustrations that reflect these changes. That means we can dive deeper into the discussion with real numbers so that you can make the most informed decisions possible about your insurance.
What Happens to the Infinite Banking Strategy?
While there’s still a lot of unknowns, we’re starting to see new developments in the 7702 change. These updated products and policies will take full effect by January 1, 2022. Not all major life insurance companies have begun to sell these new policies.
From our preliminary analysis of what’s available right now, here’s what we know:
- Guarantees have gone from 4% to somewhere in the 2-3% range on most products
- You’ll see less total death benefit compared to older policies of the same premium
- Total dividends, which include guaranteed and non-guaranteed, should not be impacted much
Are Lower Guarantees a Bad Thing?
Not necessarily. In fact, as we mentioned in our first 7702 whole life insurance updates article, lowering the guarantees can actually strengthen your company’s longevity. Remember that minimum guarantees are just that: minimums. As a policy owner, you get to partake in the company’s profits. This means that if and when interest rates bounce back, we would expect to start seeing higher returns on the non-guaranteed side.
We should also note that the guaranteed portion of your policy is a part of the declared dividend. For example, if the guaranteed side is 4%, and the declared dividend rate is 5%, you’re (roughly) getting an additional 1% in growth. However, there are certain factors that change exactly how this calculation works.
Ultimately, remember that an illustration of a policy is simply a snapshot in time. As soon as companies pay dividends, that illustration is inaccurate. So a policy illustrated in a low-dividend year won’t reflect the real trajectory of your policy. It’s simply a guideline.
We discuss this further in 7702 Whole Life Insurance Dividends Update (2021) Part 2.
Is Less Death Benefit Bad?
While total death benefit is going to be lower overall, this actually pushes the cash value up. This happens because your cash value is the portion of the death benefit that’s accessible to you. And by the endowment age, your full death benefit is accessible to you. As your policy matures, the death benefit increases, and your accessible cash value increases.
With a lower death benefit, this means that your cash value is proportionately higher than a similar policy.
While you may be losing some death benefit, what you’re not losing is cash value and the ability to access that cash in a tax-advantaged way. To solve for the death benefit, you can consider a convertible term insurance policy or put more premium into your policy.
Is There a Big Difference Before and After?
Truth be told, we’re not seeing much change between older and newer policies in terms of projected rates. As we alluded to, this is because while the composition of guaranteed to non-guaranteed is changing, the actual projection is not.
Considering this, we believe that the non-guaranteed portion of the dividend is going to make up for any lack of guaranteed growth. This still remains to be proven, however, mutual insurance companies manage their money very conservatively to take care of their contractual obligations. We don’t see the 7702 whole life insurance updates as something negative, rather it’s a tool, and one that may even prove to be beneficial for your overall IBC strategy.
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