What is Section 7702?
§7702 and §7702A of the U.S. Internal Revenue Code defines what the federal government considers to be a legitimate life insurance contract and determines how such contracts are to be taxed.
Three classes of contracts result:
- Life insurance – A “non-MEC” contract—one that fulfills all the requirements of both §7702 and §7702A—receives all the traditional tax benefits of life insurance.
- MEC – A modified endowment contract (MEC) meets the requirements of §7702, but not §7702A. Gain in a MEC is still shielded from taxation as long as it’s realized through death, but distributions are subject to LIFO taxation and may incur an excise penalty.
- Not insurance – A policy that doesn’t meet the requirements of §7702 isn’t life insurance at all for federal tax purposes.
When to get Cross Border testing?
- U.S. citizen living in Canada with a U.S. issued policy - US citizens are subject to US tax rules, no matter their country of residence.
- U.S. citizen living in Canada with a Canadian issued policy