What Mark Ford is promising in his latest pitch for the Palm Beach Letter, is about an account that’s been used by the wealthy. And by “six different U.S. Presidents,” including John F. Kennedy and Franklin D Roosevelt, whose pictures aplomb some of his ads. The sales pitch is all about generating interest into an “IRS-exempt” retirement income, for folks who are looking for a better retirement.
So here is the explanation… Dyson calls it the “770 account” to make it seem enigmatic (that’s what makes it intriguing also), honestly, it’s a cryptic on its own, even if you don’t give it a devious name.
I think, similar insurance products are already being touted by lots of sleazy infomercials, whose potentials make you wary, with names like “Bank on Yourself” and “Infinite Banking” and such.
I’m pretty sure Tom Dyson is talking about some kind of life insurance here, well not just ordinary life insurance (that makes sure your family’s not impoverished if you die), but probably a precise class of enhanced permanent life insurance that is called “whole life.” Rather it’s more of a wealth protection and tax savings policy.
Whole life insurance is typically an arrangement between you and the insurance company, where they promise to pay you an assured sum when you are no more. And the contract never expires as long as you are making the payments.
Well, that clearly defines the payments are larger than that of, typical term life insurance policies, as a term policy expires at some point in time — and a term life insurance policy practically never pays you and, so it’s apparently cheap.
That’s because you’re young and healthy and the policy expires when you’re 55, that’s when mortality risk takes you over. Pretty confusing eh? Please bear with me as this write up is meant to cover folks who understand insurance, and are on the lookout for a better retirement solution.
Update by Mark Submitted on January 1 2014 Anything over your COI is considered an over payment of premium. That is why it is not taxable. You are giving the insurance company your extra funds which you can certainly borrow and the interest is credited to you because it is your own money you are borrowing. Makes sense doesn’t it.
With the extra money you are depositing in the insurance companies account, they use that in the stock, bond and insurance markets to make money, pay you back a dividend of 5-6%, which again is your own money that they are using to create growth and then claim it is not taxable by the IRS.
Your own net cash is truly non-taxable because it is net cash which has already been taxed. The only time you benefit is from the death benefit which will be sent to your beneficiaries, certainly not to you. The insurance moguls have actuary tables that show almost to the millisecond when you will pass.
If something unforseen happens then they lose, but the probability of that happening is calculated almost 100% accurately. Thus, they never lose. Check out the largest buildings in every major U.S. city.
Most share insurance company or Bank names. The tax umbrella of whole, universal, indexed universal etc. policies does have a place, but I have never made money on insurance policies.
Update by Howard 14 December 2013:
I know exactly what this is. It is legal, effective and an investment strategy. It is a Universal Life Insurance policy at the core, with some added bells and whistles. People who use this strategy are typically not looking for life insurance but for the cash accumulation (100% tax free, unless you add too much money and turn it into a MEC – which you want to avoid).
Think of Universal Life, as having 2 halves. The first half is Cheap (Term) Life Insurance. Depending on your health, the mutual company will rate your “Cost of Insurance a/k/a COI”.
So if you invest into a 100k policy and your COI is .40, you are paying $40.00 a month for a 100k life insurance benefit – which pays at death, 100% tax free but, that’s not all.
The Second half of the policy is a tax free, guaranteed return account. This account can be indexed to follow indexes, such as Mutual Funds. Realize these are clone accounts, in that they are not the exact Mutual Fund, where you can earn and lose money.
The second half of a Universal Policy is guaranteed to pay a “floor”, typically 4-5% annually. You cannot lose money EVER! Earnings grow tax free and can be “borrowed” out of the account at any time after an initial 2-5 years of “seasoning” your account.
When you “borrow” money from your account it typically costs like 2% but remember, you’re earning a guaranteed floor – so you’re still earning money!
There are many advantages to have a Universal / Variable Universal Life Insurance Policy. You can “hide” lots of cash in it, without the IRS ever knowing it’s there – as long as you NEVER OVERFUND it.
As an example, if I had a 100k policy and had a COI of .40, than every dollar I “deposited” over $40.00 a month, would go into the cash savings half of the policy. If I sent in $250.00 a month, then $210.00 every month would go into the savings portion and grow tax deferred @ a guaranteed floor of 5%, some years you will earn closer to 7-8%, depending on the clone you are indexed to.
And that’s where you have a few options to make.
Keep in mind, you cannot add any amount you want, there are strict guidelines for maximum monthly contributions, hence “over funding = MEC”. MEC negates tax advantages and is why people might own several of these accounts at once.
It’s really a fantastic investment tool. The IRS has wanted to go after these accounts for decades but, so many people in the Government have these accounts and huge lobbyists such as the AARP have defended these accounts.
I do not sell life insurance anymore but, I agree that these accounts have a place in every investment portfolio.
Update by Anum 1 December 2013:
You could defer the realization of income by using the cash advanced against the surrender value, but then you have to pay interest on the loan. So the idea that there is some unadvertised “secret” plan is (of course) pretty much expected from newsletter vendors.
IRS Section 7702 by the way is used for the purpose of calculation of taxes relating to Life Insurance. There is no such section 770 of the IRS. It seems they have used the number to create a clandestine around IRS section 7702 while deliberately leaving out the last digit to mystify the pitch.
An Update to this by Roy Torres: 14 Nov 2013
It’s universal index life that invests your money in the stock market, ironically, but is managed with a stop loss in place so that you get a guaranteed 6% or more and the insurance company keeps any additional profits. The insurance company will actually guarantee it because they will make more.
Permanent Life Insurance policy with a Paid Up Additions Rider essentially does turn you into your own bank where you can finance all of your own purchases and pay the interest back to yourself through these specially designed policies after it is seasoned for 5 years.
They can’t call it an investment however and so no one knows that it is a great “investment”. Plus, if you die or reach 100 years of age, a lump sum payout will be in order that will far exceed your buy in. Brokers get a commission just like any broker who sells anything does.
Any money you borrow against it, is charged interest but the money is yours so the interest you pay actually gets credited to your account. So effectively, you become the bank. Just like a 401k, if you borrow from it, the interest you pay gets credited to your account.
It’s not new or any secret, but like all insurance, it is highly regulated.
Update by Craig Sedery November 20, 2013
There are two major forms of life insurance – Term and Paid-up Term insurance is the newer version of the two. Then there are versions of each that can provide services to different scenarios. Term insurance is temporary insurance where the amount of the insurance premium versus the insurance benefit is based on the age of the insured.
Paid-up insurance premiums are based on a person’s longevity and the type of plan you are applying for. In Paid-up you can have Single Premium Purchase, Age 65 Paid-up and Whole Life Insurance, each provides different types of coverage.
AND the newest of the insurance plans is the Universal Life Insurance plans which are a hybrid of Term and Paid-up. your premiums are held in an account and the insurance is term insurance. the account allows for surplus while you are young, this surplus is used to help pay the premiums as you get older. Contact your insurance agent for the best fit for your needs.
In summary – Term Insurance is a good buy as long as all you need is to provide a death benefit, paid-up is more expensive but can give you more options. Best of luck to all!!