TAX CODE
7702 : Fueling accumulation sales
This recent 7702 change has made the insurance wrapper less expensive , through a reduction in required insurance and thus , cost of insurance .
A pure accumulation sale utilizing Indexed Universal Life ( IUL ) insurance or Variable Universal Life ( VUL ) Insurance takes the traditional protection view of life insurance and turns it on its head . Instead of a client wishing to pay the minimum premium for the maximum amount of coverage , for an accumulation sale , a client is looking to maximize premium and minimize the death benefit . Inherently , this maximizes cash value or non-insurancebased premium that can be utilized for investment . Since the 1980s , the IRS tax code gives guidance on how much insurance must be purchased per premium dollar to maintain its qualifying status as life insurance without becoming a modified endowment contract or MEC . That tax code , known as 7702 and 7702A , was altered recently with the passage of the
Consolidated Appropriations Act of 2021 .
Increasing appeal
Charles Arnold is the Chief Marketing Officer for The Leaders Group , Inc . located in Littleton , CO . The Leaders Group is a national , independent broker-dealer servicing wholesale distribution firms , independent insurance agents and financial professionals for over 25 years .
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There has already been a lot of industry coverage pertaining to this change as it will likely increase the appeal of the accumulation-based life insurance sale for years to come . In short , it reduced the interest rate assumptions required under 7702 for insurance carrier product calculations , giving needed relief during this sustained low-interest rate environment for the product manufacturers but , at the same time , allows for more premium dollars to be paid relative to the amount of required insurance . Less insurance required generally means less cost of insurance or COI , which provides for a cheaper insurance wrapper to be placed around the cash value investment .
By the nature of this design , it lends itself heavily towards either indexed or variable life insurance because of the ability to invest the cash value in sub-account funds or market-linked indexes . The same can be said for private placement life insurance , or PPLI , which is an ultrahigh net worth client sale . This should also increase appeal for institutionally priced products such as COLI insurance sales , non-qualified deferred comp strategies , and business-oriented planning in general .
Ways to convey the benefits
Given this change , how can insurance professionals better convey these benefits in the field ? Against a very uncertain income tax environment to come , this type of solution should be very appealing for high-income individuals who are relatively young and healthy . Think of it this way : we do not know where income tax rates will go in the future , but with a current federal debt-to-GDP ratio * of 128 %, massive federal spending planned , and a tax-friendly administration , it is likely that taxes will increase for high earners to beef up the revenue side of the equation .
44 Perspectives Q3 2021