Tax Changes in CARES Act Creates Opportunity
You may not be aware, but you might a fantastic opportunity to use permanent life insurance as a place to store cash, build reserves, get a better savings rate than the bank offers all along with the ability to earn never-ending compound interest and the ability to use the same money for something else without typical restrictions to accessing your money. That is all in the 7702 Plan.
The bill stood untouched for decades until the CARES Act represented the first major change the 1980’s to several key categories of section 7702. That spending bill Trump signed into law on January 1, 2021, came with critical changes to the IRS code that has made Privatized Banking such a powerful opportunity to educate yourself on.
What is Rule 7702
In summary, this is the part of the tax code that enables Privatized Banking strategies with permanent life insurance. The definition of life insurance has been defined in the past to offer many tax advantages such as: tax-deferred growth, tax-free policy loans and a tax-free death benefit.
Because of these tax advantages, there are rules that prevent permanent life insurance from being abused by the wealthy. Simply put, if too much money is funneled in too quickly a policy can become a modified endowment contract (MEC) which destroys advantages of the approach and the policy.
What is the Deal with a MEC?
Up until the 1980s, people were taking advantage of permanent life insurance by purchasing a small face value, pumping it with extra money, and calling it life insurance. Without a MEC guideline, they were reaping all the tax benefits of that approach.
Then in the mid 1980’s, the government put a stop to that by placing limits on over-funded policies. While still possible to overfund, now once a policy becomes a MEC, it no longer carries the same tax advantages.
The difference in the MEC testing is that going forward, the MEC test will be based on a floating rate relative to the Prime rate which creates more flexibility for incoming and outgoing cash.
The Impact of the CARES Act Changes
One of the other powerful effects and impacts of the changes is that you can now funnel in more money per death benefit without a policy becoming a MEC which is big deal. This can improve compounding as well as make more cash value available to you which are both key points in creating a privatized banking strategy.
This is all possible because of the cost of insurance which is based on the face value of the death benefit and the actuarial tables. The insurance company calculates the cost of insurance and premiums are based on this calculation.
In the early years of a policy most of your basic premium goes to paying the cost of insurance. Additional premiums allow you to funnel money in beyond that amount, which means more of your money will go into your cash value. These additions can improve the cash amount available to you in early years.
Conclusion How to Interpret
The trick to Privatized Banking is to design policies with as much premium as possible, without a policy becoming a MEC. That way, you can get as much cash value as possible, while still reaping the benefits of tax advantages.
You should see the recent changes to 7702 as an opportunity to grow and learn about the Privatized Banking concept, strategy and application. The changes will contribute to the sustainability of self-banking, allowing more people to take part in the benefits of Privatized Banking for years to come.
Only time will tell how some of these changes play out, but this looks like a big win for those that take the time to educate themselves on what is happening in terms of changes and what that means in potential opportunity.
Disclaimer: This article is not a recommendation to buy permanent cash value life insurance but a recommendation to further educate yourself on how money works and to continue to understand changes that potentially affect your money both now and in the future.