770 Accounts 101

Is This Life Insurance Policy Hope or Hype?

770 Accounts 101
March 22, 2016

You may have seen ads talking about "secret 770 accounts," financial vehicles that let you retire 100% tax free, are not reportable to the IRS and never go down in value. Many of these ads have a tone that says "scam" to the more cautious investor. While it is not fair to call them a scam, it is also not fair to call them retirement programs — and, arguably, they should not be called accounts either. They are simply a form of permanent life insurance used more as an investment than for the traditional death benefit.

The name 770 account (sometimes they are referred to as 7702 accounts) is derived from Section 7702 of the tax code which concerns the rules regarding the taxation of life insurance policies. The marketers promoting these policies use these names presumably to equate them to 401(k) retirement accounts that also get their name from the tax code. More importantly, they also avoid initially calling it life insurance as many people respond negatively when “life insurance” is mentioned or discussed.

With permanent life insurance policies, death benefits are tax-free and the interest and gains in the cash value account are not included in the policyholder's current income. However, in these strategies the death benefit is lowered to minimal levels, making the cash values grow faster such that the policy is clearly more an investment instead of a traditionally designed life insurance policy. Thus, you could have a more stable cash value build up with the tax-free access to the money.

In Section 7702 the IRS draws the line that identifies what can qualify as life insurance and still maintain the tax benefits of life insurance. 770 accounts are merely overfunded life insurance contracts that, if properly designed, take you right up to that line without crossing it. There is nothing wrong with that — that is why the line exists.

Newsletters touting 770 accounts point out that big banks have millions of dollars tied up in these investments, and the extremely wealthy can use them as tax shelters. Are you extremely wealthy (or a big bank with thousands of employees)? If not, that is really an irrelevant selling point.

The more money that you can devote to this form of “investment”, the more likely it is to make sense to you because of the tax sheltering aspects of life insurance. At higher income levels, limits on IRA and other retirement contributions may make 770 accounts far more attractive compared to other options. However, you do not care how it affects big banks; you only care about whether it makes sense for you.

As stated above, a 770 account gets as close to the line of an investment as possible without crossing it. Essentially, your life insurance policy is "overfunded" to the fullest extent possible while at the same time minimizing the death benefit. Over time, the growth allows the policy to provide tax-free access to higher cash values to fund retirement costs.

Meanwhile, you do receive interest credited to your cash value account. This constitutes the yearly payments that 770 pitchmen refer to. Again, there is nothing special here; that is how life insurance works. You have a choice as to how your cash values are invested. You can use either a fixed, variable or indexed crediting method to determine how your cash values will grow. In my opinion, you can use either a fixed or indexed method but you should stay away from using a variable policy as these will subject your cash value to losses. Other than the tax advantages, the ability to avoid market risk and still grow your money is a significant additional advantage of using life insurance to save for retirement.

Also consider that it takes time for life insurance policies to build up sufficient cash values to meet your objectives — the older you are, the less this form of investment makes sense. Unfortunately, as it is being pitched as a safe retirement program, this aspect can get lost in the marketing.

Since 770 accounts are individual contracts with an insurance company, your agent should help you understand the fees and costs associated with the policy, as well as the interest rates that are charged when borrowing against the policy (guaranteed or variable) and what happens if premium payments are late or missed. Please understand that there are significant differences between universal and whole-life policies but this comparison is beyond the scope of this article.

Life insurance contracts used as an investment are expensive in the short-term (especially if cancelled early) and comparatively inexpensive in the long-run. Either way they are profitable for insurance companies — that is why they sell them. You must compare using life insurance against other uses of your money such as investing in an IRA, 401(k) or other more traditional retirement programs.

My advice is not to sign anything until you can do a complete cost-benefit analysis, compared to an alternate use of your money (do not forget any life insurance needs you may have). Also, make sure that you understand the fine print of the contract regarding the possibility of interest rate or crediting rate changes or what happens when the money is withdrawn. If you cannot do that analysis on your own, seek the advice of an independent financial planner or get your CPA involved in the discussions.


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  Conversation   |   21 Comments

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Victor | 08.20.15 @ 13:51
Great article, and great insight, I need one of those accounts
Britt | 08.20.15 @ 13:52
When I was doing some research on different types of life insurance and have always thought that the whole life insurance plans are better than the partial ones , especially when it's a long time sort of deal.
Andrea | 08.20.15 @ 13:56
Looks like it is something that I can check out more thoroughly. .
Daniel Dohlstrom | 08.20.15 @ 14:08
I had thought the stories I read were too good to be true. Best advice for this and everything right at the end .. Do not sign anything until you are sure it is legit and will work for you.
Erin | 08.20.15 @ 14:08
I have never heard of these plans before. This is great information to have on hand. Thanks.
Sara | 08.20.15 @ 14:21
I guess the saying still holds true. If it sounds too good to be true it probably is. With that being said always read the fine print on anything.
Elaine | 08.20.15 @ 14:49
I haven't heard anything about these plans but I always believe in fully checking something out before agreeing to anything. Especially when there is fine print.
Jackie | 08.20.15 @ 14:50
Much to think about before buying into a whole life insurance policy. As always, reading the fine print before signing and due diligence in researching companies pays off.
Apryl | 08.20.15 @ 14:50
I still find this a tad uncomfortable. Something about it just makes me uneasy.
Crystal | 08.20.15 @ 14:56
I have never heard of a 770 account. I don't think it's something I would consider only because of the risks. I like to play it safe financially.
Nancy | 08.20.15 @ 14:58
It's definitely for those with more to invest than I. I had never heard of 770 accounts. If I see them advertised i will now know that they are not for me
trish | 08.20.15 @ 15:02
Definitely a place to start but wow there is so much information to take in and learn about! wish there was an easier way to find what you need!
Irene | 08.20.15 @ 15:03
I always felt if it sounds too good to be true it probably is. I stick with modest, safe, annuities.
Alec | 08.20.15 @ 15:05
I've never heard of a 770 or 7702 account. This seems like something I'll have to look in to further since I don't completely understand it. The article makes it sound like something only those with high income can afford to invest in because of the high premiums. I'd have to weigh the cost/benefit as stated to see if the lack of taxing would make up for the high cost in the long run.
Bobbie | 08.20.15 @ 16:00
Crazy how much each plan can be so different. Hubby and I have been doing a lot of research with his retirement looming.
Zanna | 08.20.15 @ 16:19
This is interesting, since this is a life insurance policy that needs to develop over a long time, would it make sense to start these for children?
Christina | 08.20.15 @ 16:23
I have never heard of this before.. I will be doing more research.. Thanks for the article..
Christina | 08.20.15 @ 16:25
I have never heard of this.. I will be doing more research.. Thanks for the article.
Christina | 08.20.15 @ 16:33
This is something I've been looking into lately -- I've put off buying life insurance because it all seems so confusing! I appreciate having this information.
Rindy | 08.20.15 @ 16:52
This is new to me and something I find very interesting. I plan to look into it further, it could be a very good option for me.
Sarah | 08.20.15 @ 17:17
This is a very comprehensive article explaining this type of account. Very well done. I will be sharing this with some of my working friends.
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