Section 7702

What Does Section 7702 Mean?

Section 7702 of the Internal Revenue Code defines what qualifies as a life insurance contract and outlines the taxation rules for such contracts, particularly those with a cash value component. It also establishes specific limits on premiums and death benefits to ensure the contract meets life insurance criteria. These limits shape whether life insurance is taxable for the policyholder, since a qualifying contract keeps its cash value growth tax-deferred and its death benefit income-tax-free for beneficiaries. This section does not apply to life insurance policies issued before 1985.

Insuranceopedia Explains Section 7702

Section 7702 limits the tax benefits available to life insurance policies by defining the criteria for what qualifies as a life insurance contract. To comply, a contract must pass either the Cash Value Accumulation Test (CVAT) or the Guideline Premium and Corridor Test (GPT). A contract passes the CVAT if its cash surrender value does not exceed the net single premium needed to fund future benefits under the policy. For the GPT, the total premiums paid to date cannot exceed the guideline premium limitation, ensuring that the contract remains within defined tax-preferred boundaries. The two tests are why permanent life insurance policies cap how much you can pay in premiums relative to the death benefit. Overfunding a policy past those limits causes it to lose its life insurance tax status and become a Modified Endowment Contract.