If you’ve ever been pitched on a 702(j) retirement plan by a salesman, then you already know it’s not a retirement plan at all. A 702 plan is life insurance that’s commonly advertised as a retirement plan. The 702(j) retirement plan even mimics the lingo of actual plans such as the 401(k) and the 403(b). This deceptive marketing leads many consumers to think it’s a scam or hoax.

While it’s legal, a 702 account is a complex and pricey insurance product that could be right for you — but probably isn’t. Consumers have a large variety of other bonafide retirement plans that can better meet their needs, and at a lower cost.

What is a 702(j) retirement plan?

OA 702(j) plan is permanent life insurance that can cover you for life. This type of plan requires policyholders to pay monthly premiums, which grow tax-deferred and provides a tax-free death benefit. In addition to paying for the insurance, part of the premium goes into a cash account that is accessible (tax-free) by taking out a loan against the policy. The policyholder will then be paying more than necessary to keep their insurance, with any excess acting as enforced savings.

This loan policy is how aggressive marketers claim that consumers can enjoy a tax-free retirement. These tax-free loans don’t need to be repaid while the policyholder is alive; however, they are repaid from the death benefit after the owner is deceased.

The biggest downsides to these plans are the high expenses, including typical life insurance fees and commissions. These expenses curtail how fast your policy’s value can grow and inhibits the loan amount you could withdraw later, especially when compared to traditional retirement plans. And if you lapse on paying the monthly premiums, you won’t be able to maintain the policy.

Pros of 702 account

• Tax-deferred growth of monthly premiums
• Offers a tax-free death benefit
• Loans can be taken out tax-free
• Withdrawals not treated as income

Cons of 702 account

• Funds are diverted from other retirement plans
• Lost matching contributions on 401(k) plans
• High insurance premiums
• Lost tax breaks from traditional retirement plans
• Any outstanding loans from the plan can be charged interest
• If you can’t repay the loan, investment gains could become tax liabilities

Consumers also have to watch out for complex insurance contracts that may be difficult to understand. If you don’t understand the benefits and all associated costs, it’s best to simply stay away from 702(j) plans and stick with the traditional alternatives.

702(j) plans are not a scam

Some consumers think 702(j) plans are a hoax because salespeople aggressively pitch the product as a special loophole only available to the wealthy or so-called “insiders.” While the marketing may feel deceptive, the plans themselves are perfectly legal.

The program — also known as 7702 or 702 plans — takes its name from Section 7702 of the United States Code, which outlines the rules for insurance contracts. The code itself deals specifically with life insurance products, not retirement plans. That still doesn’t stop marketers and salesmen from marketing a 702(j) as a retirement plan, which is why it’s so important to conduct thorough research on any financial product.

Is a 702(j) plan right for me?

Even if they truly aren’t retirement plans, permanent life insurance may be right for you, depending on your unique situation. For example, those who want life insurance can make use of the plan because it provides a death benefit. That benefit could be valuable for your heirs if you don’t anticipate living long —or saving—enough to make a traditional retirement option viable.

These plans can also be useful for retirees that expect to have a high income throughout retirement. They can help retirees avoid increased taxes and charges for Social Security income and Medicare because insurance payouts aren’t treated as income. Unlike traditional retirement plans, you’re not obligated to take a required minimum distribution from a 702(j) and it’s tax-free, so it allows you to minimize taxable withdrawals from traditional retirement accounts.

While permanent life insurance may not be for you, there are many circumstances where term life insurance is a prudent choice. Here’s everything you need to know about term life insurance.

702(j) retirement alternatives

Rather than sign up with a deceptively marketed 702(j) plan, consumers have quite a few other, more desirable options for retirement. The following plans offer substantial tax benefits today, with the potential to grow your nest egg tax-free over time:

• 401(k) plans. These employer-sponsored plans give you a tax break today and can let your retirement savings compound tax-free for decades. You can save $19,000 in 2019, and many employers offer to match your contributions. 401(k) plans allow you to deduct the contribution from your income, so you pay no taxes on those earnings.
• IRAs. Not all employers offer 401(k) plans, and if they don’t, an individual retirement account (IRA) could be the next best alternative, which is available to any wage-earning bracket. Starting in 2019, you can save up to $6,000 per year which you can deduct from your income. Additionally, those contributions grow tax-free over time.
• Roth IRA. Some advisors argue that Roth IRAs are better than traditional IRAs due to one particular benefit: tax-free retirement withdrawals. Roth IRAs give you a tax benefit once you enter retirement, all while letting your money grow tax-free.
• Health savings accounts. HSAs can help you save tax-free for healthcare expenses in retirement. Any contribution to an HSA is tax-free along with any payment made from the account for healthcare expenses. Account earnings are also tax-free, making it one of the best retirement vehicles out there.
• Options for the self-employed: SIMPLE IRAs, SEP IRAs, Solo 401(k)s and others. There are a host of other retirement plans for the self-employed and small business owners, each with their own rules, and pros and cons. They all help savers supercharge their retirement savings with various tax-free benefits.

A 702(j) plan isn’t the smartest retirement option — it’s technically life insurance, and there are many alternatives that offer stronger benefits for a more comfortable retirement. The most important thing to remember when it comes to your retirement savings — regardless of your plan — is to start contributing today. Compound interest grows with time, and the longer your money sits, the more valuable it grows.