The IRS created the 7702 code so that Americans could not shelter wealth in a whole life insurance policy. There are limits to the amount of money one can put into a whole life insurance policy's separate account and they are based on the amount of life insurance coverage. If one even tries to shelter money in the account beyond a certain limit, the whole life insurance contract becomes a modified endowment contract.
According to www.ameriprise.com, "The IRS definitions are essentially tests to ensure that an insurance policy isn't really an investment vehicle." Other third party consumers such as Suze Orman and Dave Ramsey also advise people to avoid purchasing whole life insurance policies.
A loan is not tax free retirement! Some agents promote the fact that you are allowed to take a loan on your policy, which will allow you to not have to pay taxes. This is true of any loan but would not be a good reason to purchase a whole life insurance contract. For tax purposes, using after tax dollars to fund the policy and still having to pay taxes on earnings if you surrender the policy is completely ridiculous. Later, I will show you how to actually create a tax free retirement and there are ways to do this no matter how much income you make.
This post was reposted from http://finlit.biz/life-insurance/should-you-purchase-a-whole-life-insurance-contract-which-promises-tax-free-retirement/, originally written on January 21st, 2013.
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