Glossary

Section 7702

The federal tax code section that defines which contracts count as life insurance, limiting how much cash value a policy can hold for its death benefit.

Also called: IRC 7702, 7702 plan, definition of life insurance

Section 7702 of the Internal Revenue Code sets the tests a policy must pass to be treated as life insurance for federal tax purposes. Passing matters: it's what lets cash value grow tax-deferred and the death benefit generally pass income-tax-free to beneficiaries. If a contract fails, the policy's internal growth becomes taxable to the owner each year.

A policy must meet one of two tests. The cash value accumulation test caps the cash value at the net single premium needed to fund the future death benefit. The guideline premium test limits total premiums paid and adds a corridor requirement, so the death benefit must exceed the cash value by a set percentage that shrinks with age. The Consolidated Appropriations Act, 2021, enacted in December 2020, replaced the fixed 4 and 6 percent interest rates used in these tests with lower, market-based rates for policies issued after 2020, which allows more cash value per dollar of death benefit.

"7702 plan" is a marketing label, usually for indexed universal life, not a special type of account. A separate rule, the seven-pay test in Section 7702A, decides whether a policy that passes 7702 is a modified endowment contract. See how cash value is taxed: withdrawals, loans and surrenders.

Last reviewed October 4, 2026

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Related terms

Seven-pay test The IRS test that flags a policy as a modified endowment contract if premiums in its first seven years exceed what would pay it up in seven level payments. Corridor (death benefit corridor) The minimum gap the tax code requires between a universal life policy's death benefit and its cash value to keep the policy's tax advantages. Cash value The savings component that builds inside whole life, universal life and other permanent policies, which the owner can borrow against or withdraw. Death benefit The money a life insurance policy pays to the beneficiaries when the insured dies, usually the face amount adjusted for loans, riders and dividends. Overfunding a policy Paying more into a permanent policy than its coverage requires to build cash value faster, while staying under federal limits that protect its tax benefits.

Related guides

Withdrawing cash value from a life insurance policy How partial withdrawals from permanent policies work, what they do to the death benefit, when they are taxed, and how they differ from loans and surrender. Corporate- and bank-owned life insurance (COLI and BOLI) What COLI and BOLI are, why employers buy them, the notice-and-consent rule (IRC 101(j), Form 8925), IRC 264 interest limits, and bank regulator oversight. Life insurance in nonqualified deferred compensation How employers use company-owned life insurance to informally fund nonqualified deferred compensation, with IRC 409A, 101(j) and 264 rules and creditor risks. How cash value is taxed: withdrawals, loans and surrenders Cash value grows tax-deferred. Withdrawals are tax-free up to your premiums paid, loans usually are not income, and a surrender above basis is taxable income. How interest rates affect life insurance prices Insurers invest premiums in bonds, so long-term rates matter most for lifelong and guaranteed policies and least for level term. How each policy type reacts. Is life insurance taxable? Death benefits are usually free of federal income tax, but interest, estate tax, policy sales, cash value gains and some transfers can create a tax bill.

Related insurers

Axcelus Financial Formerly Lombard International US, a Philadelphia carrier of private placement life insurance and annuities for the wealthy, owned by BroadRiver since 2023. Investors Preferred Life A small South Dakota carrier that writes only private placement life insurance and annuities for accredited, ultra-wealthy investors through their advisors.