For years, high-net-worth individuals and businesses have relied on life insurance as a strategic financial tool — not just for protection but for tax-efficient wealth accumulation. In December of 2020, changes to IRC Section 7702 created more favorable conditions for life insurance. It has taken insurers several years to develop new products to take advantage of the change. The good news is insurance carriers finally have the new life insurance products approved at the state level and built to take full advantage of these rule changes.
Recent changes in the tax code make tax-free (or tax-deferred) accumulation within life insurance more compelling than ever.
A Quick Refresher on IRC Section 7702
IRC Section 7702 governs how life insurance policies qualify for tax advantages. Historically, these rules required policies to meet strict premium and cash value limits to avoid being classified as a modified endowment contract (MEC), which comes with less favorable tax treatment.
The 2020 updates modernized and reduced these limits, acknowledging the decades of lower interest rates for life insurance carriers. The result? Policies can now accommodate larger premiums while staying within the tax-advantaged limits, leading to:
Higher early cash value growth
Greater flexibility for tax-deferred or tax-free accumulation
More efficient funding for estates and businesses
The Waiting Game Is Over: New Products Are Here
While these rule changes have been in place for a few years, life insurers needed time to develop and get state approvals for policies designed around the new guidelines. Now, leading life insurance carriers have officially launched products tailored to maximize the benefits of the updated 7702 framework. This includes our proprietary product suite, including Magnastar for Private Placement Life Insurance (PPLI).
What does this mean for you, our client?
Enhanced Growth Potential: New policies allow for more significant premium contributions without triggering MEC status, meaning more dollars can grow tax-deferred or tax-free within the policy.
More Flexibility in Funding Strategies: Businesses and high-net-worth individuals can leverage these policies for tax-efficient income distributions, key person insurance, and wealth transfer strategies with improved cost efficiency.
A Strong Alternative to Traditional Investments: Given the challenges of reallocation and the tax burdens on taxable investment vehicles, properly structured life insurance policies now offer even more compelling long-term financial benefits.
Is It Time to Reassess Your Policy?
If you have an existing cash value "permanent" life insurance policy structured for growth of the underlying cash value investment, it’s worth reviewing whether the new 7702-compliant products offer better opportunities for your financial goals. For those considering life insurance as part of their wealth accumulation and transfer strategy, now is the time to explore the latest options.
At TRC Financial, we specialize in helping affluent individuals, families, and businesses navigate life insurance solutions tailored to their unique needs. Schedule a time to discuss how these new policies can work for you and ensure your wealth strategy remains optimized for today’s landscape.
This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. To determine what is appropriate for you, please contact our firm. Information obtained from third-party sources is believed to be reliable but not guaranteed. If tax, legal, or actuarial advice is required, you should consult your accountant, attorney, or actuary. Neither TRC Financial, nor its M Financial Group should replace those advisors.
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