What is a 770 Account?
What is the 770 account? Is it a scam? Is it real? Do some presidents, big corporations, banks and millionaires really use them? How can I open a 770 account? Who can help me open a 770 account? Is this too good to be true?
These and more questions are circulating the web right now, and I wanted to take the time to answer each one of them.
What is a 770 account?
This "770 account" is not more than Permanent Life Insurance with a twist – it maximizes the Life Benefit and not the Death Benefit. There are many factors that need to be in place before the life insurance policy can turn into a “770 account.” It has to be from a Mutual Insurance company (Participating Whole Life Insurance), it needs to have a paid up additions rider, you will need to be on the MEC line of the policy (explained later), and it works better with non-direct recognition companies.
Wait a second – I heard these policies are not the best for investments. What makes these policies so different? What are the benefits of getting this type of policy?
If you get a normal permanent life insurance policy from a normal company/agent, then you are just getting an ok death benefit, but the cash value will grow at a very low rate and you won’t see any money for the first 3-5 years.
What makes them different?
When getting this type of life insurance policy (or 770 account), you are doing this for the LIFE benefit (cash value growth/value, tax free accumulation/distribution, etc.), not for the death benefit. So you will want to get the minimal death benefit you can for the maximum monthly/yearly premium you can put in. (We have had clients that put as little as $300 a month, and as much as $1,000,000 a year.) When you get the minimal death benefit possible for your money, then you are maximizing your cash value and your LIVING benefits. This is opposed to buying a life insurance policy with the maximum death benefit you can get, where you will see a ZERO cash value on your policy for the first 3-5 years. This is what the average insurance agent wants you to get, because that will maximize his incentive (and because they probably don’t know better).
What are the benefits?
When structured correctly (as a 770 account), you will get the following: No risk, guarantees, no penalties, liquidity use and control of your money, protected from creditors, leverage, tax deferred growth, tax free distributions, competitive rate of return, collateral, disability benefits (optional) until age 65, and a Death Benefit that will go to the heirs tax free.
Is this “770 account” too good to be true?
It’s actually not because it doesn’t promise you UNREAL “get rich quick” results, but it offers a steady rate of return. Based on my average client who is 45 years old, and based on the low dividends that companies are paying today, he will receive a rate of return at retirement of 5.3% (which is better than 95% of the mutual funds/index funds in the last 15-20 years). But the KEY ingredient is that it is TAX FREE, so if you want to match that with a mutual fund, you will need to get a rate of about 7.6% EVERY YEAR - with no negative years. This is almost impossible, considering that the market is so volatile, and the management fees and other hidden fees that they charge are about 2-3%.
IMPORTANT NOTE: The 5.3% that I am talking about is based on the LOW dividend’s rate of today’s economy. A change in available interest rates is the main factor that causes a change in dividends. So the results and the interest rate in the future will probably be better!
How about the tax consequences? Is this “770 account” really tax free? Where in the IRS code does it say that it is tax free?
Yes – this account CAN be tax free (tax free growth and tax free distribution) if you set it up properly; that is why is so important to find an agent/adviser who has the knowledge and experience to set up this type of account. There are some things you need to keep in mind while using your policy throughout your life so you don’t ever pay taxes with this policy, but that is something I would recommend that you discuss with your agent/adviser. One more thing I want to mention is that is not reportable to the IRS (Tax treatment of life insurance – Document: GAO/GGD-90-31 IRS code). This will make your tax bracket lower - paying less taxes from your other retirement incomes, including Social Security.
Ok, we heard the good news. What is the catch? Are there any bad things about this 770 account?
There is no catch, but there are 3 cons I discovered about this 770 account:
1) Not everybody can qualify. You must take a medical test to make sure you are in good health. (After all, it is a life insurance product.) So if you are not in good health, you may have to get the life insurance for your spouse, children or grandchildren, putting yourself as the owner.
2) You don't have your full cash value available for the first few years. Why is that? Because even though we are getting the least amount of death benefit we can (permitted by law), we STILL have to pay for that life insurance.
How does that work? In the first 2 years, part of your premium goes to pay for the death benefit (a necessary evil – which will turn to be a blessing later on, considering that it is guaranteed for life, it is tax free and will grow every year).
How much of the premium will go towards the death benefit?
It depends on your type of policy or 770 account. The first year will take the biggest hit. Again, depending on how we structure the policy (and the age of the insured), it can be as low as 11% of the first year premium (depending on what we are trying to achieve with this 770 account for a particular client). The second year, the percentage that goes to pay for the death benefit will be less. But after the third year, every penny (for most policies) will be reflected in your cash value.
*That is why I addressed the “too good to be true” concern. This 770 account is not recommended for short term investments. This is a life system that you will be able to use multiple times throughout your life, not only for a passive income, but also as a banking system to finance all big expenses. You can utilize the 770 account the same way banks do (I will explain this in detail later). This 770 account has been made to get better and better over time.
But in just a few years, your cash value will reflect everything you have put into your policy and after that – it is just gold! You get a competitive rate of return and you get dividends. These companies have paid dividends for the last 100 years. Even in the Great Depression years, they still paid interest and dividends to the policy holders.
The big question is: What is the rate of return (including the money I spent the first 2 years on the death benefit)
I will get in the long run (let’s say 20 years)?
Answer: It is hard to tell – there are many variants in the equation, but I always like to go with a very bad scenario: if the economy doesn’t get better and interest rates stay as low as today for the next 20 years (almost impossible) AND if you don’t use your system AT ALL to finance big expenses (e.g. cars, college education, weddings, vacations, house, etc.), then you will get about 4.75% tax free (which will be the equivalent of earning a rate of 7.1% - no risk!!).
*based on a tax bracket of 33%
But if in the next years, the interest rates in our country start going up, this rate of return will go up as well.
3) For many plans, you need to make steady premiums every year or every month; but we can create a plan where the client can have some flexibility as far as amount of premium paid every year, including missing some years based on the client’s situation. It can be as little as $300 a month, and I have seen as much as $1,000,000 a year. (Of course, banks and other big corporations put billions of dollars into these accounts – please ask to see documentation). But the good thing is that you can choose to have a disability rider so that if you become disabled, the company will pay your premiums every month. Now, for me it was a great thing that I had to make steady payments when I started my account 8 years ago, because it helped me be more responsible about saving. It made me save money.
That sounds all dandy, but what if I am retired and don’t have the time to capitalize my system?
Can I just do a lump sum?
I have had many people who are in their 70’s ask me if this would be a good idea for them. They want to know if they can do a one large lump sum. Yes you can, and you will still receive many of the benefits like tax-deferred growth and the death benefit (it’s still tax-free). However, you will lose some of the tax free benefits: gains that exceed your cost basis (the premium you paid) are taxable. This strategy is particularly better when compared to other “ZERO-RISK” options like a Money Market account or a Certificate of Deposit from a bank. It will offer a MUCH better rate of return. It will also offer side benefits like a Death Benefit that will be bigger than the premium paid, and an “Accelerated Death Benefit” rider, which will allow you to use part of your Death Benefit- up to $250,000 or 50% of your death benefit (depending on the company) TAX FREE for terminal illness, and $250,000 or 25% of your death benefit for chronic illness.
Are these accounts protected? Banks are protected by the FDIC; what protects these accounts?
How can they have guarantees?
First of all, I want to mention that no policyholders in the United States have lost ANY of their money in their life insurance contracts. State reserve pools or guarantee associations have protected life insurance policyholders for hundreds of years. Reserve pools protect the policyholder just as much as the FDIC and have done so without taxpayer assistance.
So you have 3 layers of protection:
1) The company itself. The companies I use are rated A+ and higher - those rates monitor the financial stability. The rates also reflect financial soundness and ability to pay future life insurance and annuity claims. Life insurance companies have a proven track record of investment strength and security. They have historically outperformed banks and other financial institutions. Whole life insurance policies are not chasing short-term performance to satisfy impatient investors. The professional money managers are not seeking a quick return on the money, but rater a long-term strategy for financial stability. That is why they were the only ones that kept giving interest and dividends to their policyholders through the Great Depression. When banks were literally going out of business on a daily basis (after the Great Crash of 1929), life insurance companies injected safe patient capital into the American economy. In addition, it was the life insurance companies, not the government, that helped banks get back on their feet financially. During that time, it can be rightfully said that policyholders’ deposits, from legal reserve life insurance companies were found to be more than 99.9% safe. No other financial intermediary within America can make this claim.
2) Legal reserve pool - member life insurance companies doing business in that state are assessed a portion of liability should they go defunct. For instance, if a life insurance company is doing 2% of business in a particular state, it incurs 2% of the liability of the failed company.
3) Almost all states also have State Guarantee Funds. This is more like FDIC (which is almost useless) - it just insures the policy holder to a limit.
Where can I get more information about this 770 account?
I would HIGHLY recommend reading the book “Becoming Your Own Banker” by R. Nelson Nash, and/or “Pirates of Manhattan” by Barry James Dyke. The first book explains the process of this 770 account – which the author calls “the Infinite Banking Concept.” He explains in detail how it works and how you can utilize this system the same way BANKS utilize THEIR system to make big purchases. The second book talks more about everything in general – the government, Wall Street, mutual funds, and this “770 account.” He also talks about big companies and billionaires that are using it or have used it - JC Penny, Walt Disney etc.
Courtesy of 770Account