Internal Revenue Code Section 7702

Section 7702 is a portion of the Internal Revenue Code that describes certain conditions that life policies should satisfy in order to qualify as life insurance contract that has tax advantages.

In order to better understand this section, certain terms should be identified first. These are:
• Life insurance contract- a contract regarding life insurance policies that meets the guidelines premium requirements, the cash value accumulation and falls into the cash value corridor all on the subsection.
• Cash value accumulation means that contract terms and conditions upon surrendering must not exceed its net single premium which is said to be paid at the time the contract has been obtained to acquire future benefits.
• Guideline premium requirements is the total premium paid agreed upon the contract that should not exceed the premium limitation.
• Cash value corridor means the death benefits imposed in the contract.

Computational Rules
There are numerous factors that need to be considered in the computation of this section. These are:
• Death benefits deemed on not to increase
• The maturity date payable
• Death benefits that should be provided right after the maturity date is being determined
• The sum amount of the total endowment benefit which includes the cash value surrendered within the maturity date that should not the very least exceed the amount payable as death benefit within the span of the contract.

What happens when the contract does not meet this section?
• Income inclusion- If the contract does not meet the life insurance contract definition, then the income generated in the contract in every taxable year will be considered as ordinary income accrued or received by the policyholder.
a. Income in the contract- is defined as the sum or the increase of the net value surrendered of the contract within a taxable year. It is also the considered to be the cost and the premium paid within the contract.

Generally, the Internal Revenue Code Section 7702 implicates to place limits on the orientation of the investment in life insurance contracts in two either ways, by imposing minimum amount of death benefits and by restricting the allowed premium payment as written and mandated in the contract or both. On the other hand, it also puts restriction in terms of the assumptions underlying in the computation of these limits. In terms of mortality, tax law permits the utilization on the reasonable mortality in calculating these restrictions and points out the upper limit of the reasonable mortality.

There are three steps that a potential policyholder is secured by the conditions of this policy. This varies on the beneficiaries below listed.
1. The individual- an individual who purchased a life insurance insuring one’s life will give his family a security to receive death benefits, protection as well as a source of income. Yet, the insured still owns the policy.
2. The insured- In the event or retirement, the policyholder can take tax-free income by loans and withdrawals from the cash surrender value of the policy.
3. The heirs- If the insured will die, the heirs can opt to receive benefits through cash distribution, tax-free income death benefit and lump sum over specific span of time.