The 702(j) Retirement Plan: Why I have no love for insurance companies
FPH Views on Insurance Companies' Tactics
As a financial planner, I realize the important role insurance companies play in society in helping people pool and manage various life risks, such as the risk of your house burning down, the risk of dying prematurely, the risk of being sued, etc.
However, over 30+ years as a financial advisor, I have found the old adage that most insurance is sold rather than bought to be generally true. To put it bluntly, it bothers me a great deal that, in this day and age, it is still okay to use misleading jargon and deception to present insurance products as something they are not in order to make a commission-based sale.
How Insurance Companies Present Options and Benefits
As a simple example, many mutual insurance companies tout “tax-free dividends” as a benefit of purchasing permanent life insurance. In truth, life insurance dividends represent nothing more than a partial return of an overcharged premium.
Calling it a “dividend” is inherently misleading and fosters obvious confusion with stock dividends. For better or worse, “dividends,” have been part of the life insurance industry lexicon for generations and will likely continue to be as long as mutual insurance companies continue to exist.
In my opinion, another more insidious example of misleading insurance sales terminology includes the life insurance industry’s promotion of employer-sponsored group universal life policies as “Supplemental Roth Accounts.” Despite the name, these are insurance policies, not accounts, and the policies are completely unrelated to the section of the IRS code that covers Roth IRAs and Roth 401(k)s.
Similarly, the insurance industry’s recent promotion of the “702(j) Retirement Plan” is abominable. As described in a recent article in SmartAsset.com, “It’s not an investment vehicle. It’s a life insurance contract governed by Section 7702 of the U.S. Code, which lays out the rules for life insurance contracts. The term 702(j) is simply marketing speak, possibly designed to make the 702(j) plan seem more like a retirement plan in the vein of a 401(k) or a 403(b).”
J.R. Robinson is the owner and founder of Financial Planning Hawaii and a co-founder of software maker Nest Egg Guru.
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