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?
It was named because of the 7702 section of the IRS code that talks about life insurance. So this "770 account" is not more than Whole Life Insurance with a twist – it maximizes the Life Benefit and minimizes the Death Benefit. Now, for this account to work the way it is described in the Palm Beach Letter (and other webpages), 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 greater than the base premium, you will need to be on the MEC line of the policy (explained later), and it works better with non-direct recognition companies. Depending on the case, it can also have some other options and riders.
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 your average “normal” permanent life insurance policy from your normal company/agent, then chances are you will be getting a policy that will focus on death benefit, and the cash value will grow at a very low rate, and you won’t see any money for the first 3-5 years. If and when that is the case, I agree with the critics – these policies are not good for cash accumulation.
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, tax free accumulation/distribution, etc.), not for the death benefit. So you want to get the minimum death benefit you can for the maximum monthly/yearly premium you can put in. (We have had clients that put as little as $3,000 a year, and as much as $1M a year.) When you get the minimum death benefit possible for your money, then you are maximizing your cash value and your LIVING benefits.
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 distribution, 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, after breaking even of 6.2% (which is better than 90% 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 another instrument, you will need to get a rate of almost 9% EVERY YEAR - with no negative years. This is almost impossible, considering that the market is so volatile, and considering the management fees and other hidden fees that companies charge.
IMPORTANT NOTE: The 6.2% that I am talking about is based on the LOW dividend 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 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 accounts, 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 exam 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 someone else that you have an “insurable interest” in, like your spouse, children, or grandchildren, while 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 death benefit.
How does that work? In the first 2 years, a low percentage of your premium goes to pay for the death benefit (a necessary evil – which will be a blessing later on, considering that it is guaranteed for life, it is tax free, and will grow every year).
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.
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.
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.
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 rather 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 policyholder to a limit.
I know that if you invest your money in the stock market – mutual funds, and if you are patient enough, you will get 12%. Wouldn’t it be better to put your money there?
First of all, let’s take care of this 12% myth by saying: It’s an illusion!
Watch this video – even though it was filmed in Canada, you will see the same exact kind of abuse here in the US. After all, they use the same products and the same sell strategies. They talk about companies like Edward Jones and Primerica.
Please, do your own research and look at an index, for example, the S&P 500. See what has been the real rate of return throughout the years. You will discover that the 12% some financial advisers suggest is a lie. That “average rate of return” (which is not real) comes from the best period of time that the market has had – the 80’s and 90’s. That was a great period of time that never happened before and probably won’t happen again.
The second thing is that “average rate of return” doesn’t mean much. Example: You invest $100k on a mutual fund that a financial advisor recommended to you because they have had a 25% average rate of return. Let’s say that the first year it gives you 100% - now you have $200k! YAY! (Let’s not talk about the tax consequences though.) But the second year you lose 50%... you are mad, but your financial adviser will tell you – “Don’t worry, the market will adjust”… and fair enough. The 3rd year you get 100%... now you have $200k!! (We are not going to talk about tax consequences.) The fourth year you lose 50%, so you are back to $100k. What was the average rate of return? My math teacher told me that in order to do an average, you will need to add all 4 numbers and divide by 4. (100-50+100-50=100…. 100 divided by 4 = 25%) so the financial adviser was right after all!! You got a 25% average rate of return – too bad that it didn’t mean squat to you. The real rate of return was zero! In the same way, if we calculate the real rate of return, you will see that it will be MUCH less than the average rate of return. For example, in the last 15 years, the average rate of return was 6.2% (way lower than the 12%), but the actual rate of return was 4.5%, and that is before taxes and management fees, so your REAL rate of return is less than 3% - you are not even keeping up with inflation!!
*** Please see my video on YouTube for a closer look at this percentages: http://goo.gl/BdsqH8
But I can get a better rate of return with my investment!
It will be hard to prove, but even if that would be the case, this is not just about rate of returns – we are not comparing apples with apples here, but let’s play this game for a second. This infinite banking system (or 770 account) is not fighting with other investments. You can use this system in conjunction with other investments etc. For example:
Let’s say that you find an investment that will earn 20%.
Person A invests $1,000,000 for one year.
Gross Yield: $200,000
Les taxes (30%): $60,000
Net Yield: $140,000.
Person B – He created an Infinite Banking system, and let’s say that he has a $1M cash value, so he will do the following: he will borrow money from his system. Let’s say they charge him 8% (today, the rate will actually be much less – about 5%), and then makes the same investment as Person A. Results:
Gross Yield: $200,000
Less interest paid to his system: $80,000
Less taxes (30%): $30,600
Net Yield: $84,000
BUT, in this case he also has his money earning the 8% (it is always very similar to the interest rate that the company is charging) on a non-taxed basis. So the total results are like this:
Net yield from the investment: $84,000
Net Yield from his system: $80,000
Total Yield: $164,000
I hope now you can see that rate of return is not the topic in question here. Is about how you finance, invest, and move your money around. Many people have a lot of money in their IRAs and 401ks, but they can’t use their money – it is not liquid – they get penalized if they touch it, so what do they do? They finance that new car, pay a mortgage, and buy vacation packages with a Credit Card and pay interest to someone else – and the interest paid will be far bigger than the interest that they are generating in their retirement plan. There is something wrong with that picture. Can you see how powerful this “770” system can be now?
Do banks really use this 770 account?
Banks buy permanent life insurance by the tractor-trailer loads. Why do they buy so much life insurance? For a variety of reasons: funding bank executive and director pensions, healthcare costs and other employee benefits, to improve the income statement, to enjoy tax benefits, and to strengthen the financial stability of the bank.
Also, the cash surrender values of their life insurance are classified as a general asset of the bank and an integral component of Tier One Capital – which is the most important component of any bank; the larger Tier One, the stronger the bank.
GAO (general accounting office) found that on average, the cash surrender value of life insurance generally accounted for up to 25% of the total Tier One Capital. The GAO also found that in over 58 institutions, the cash surrender value accounted for more than 40% of their Tier One Capital.
These are some figures from 2015 - how much money banks have in Permanent Life insurance.
Wells Fargo: 18.1 Billion
Bank of America: 20.9 Billion
JP Morgan Chase: 10.7 Billion
Citibank: 4.8 Billion
US Bank: 5.6 Billion
(Click on the section "HOW IT WORKS" to see a balance sheet from a few banks)
Barry Dyke explains in his book that the CEO of Midwestern Bank confessed that Permanent Life Insurance was the bank’s best performing asset, and he ordered his people to purchase the maximum amount that the laws and regulations would allow.
Banks would not purchase billions of life insurance lightly. It would be foolish to think otherwise. Banks buy a ton of life insurance because it provides immeasurable economic benefits, financial stability, and safety – which is superior to the banks themselves.
Banks do not invest in mutual funds, speculative stocks etc. What banks recommend to the public and what they do for themselves are two different things! Do you think banks may know something we don’t?
For more information, go to FDIC.GOV, look for any bank, and check how much they have in cash value life insurance. If you have problems trying to find these numbers, please contact me or send me an email, and I can walk you through it.
But I heard that the best strategy is to buy term and invest the rest, isn’t it so?
I will answer this with another question: Where did this advice come from?
Primerica was the one who originated (or at least they were the ones who mass marketed the concept) “buy term and invest the difference” philosophy, and many other institutions and financial advisers followed their advice.
So what exactly does Primerica (which is owned by Citigroup) promote? Taken from their website: “At Primerica, we sell 100% term insurance, 100% of the time because we believe it’s the best choice for most families. Contact your representative near you for more information on our life insurance products and our “Buy Term and Invest the Difference” philosophy.”
Now, the first thing I would like to ask any sales person is the following: are you following your own advice? Or in other words: Are you practicing what you preach?
Let’s analyze that – as I mentioned, Primerica is owned by Citigroup. What is Citigroup doing? Do they buy term (for their executives) and invest the difference? The answer is an emphatic “No!” Citigroup obviously knows the value and strength of Permanent Life Insurance, particularly as it relates to its balance sheet. As of 2015, Citibank reported $4.8 billion in cash surrender value for its Life Insurance Tier One account.
I worked for Wells Fargo for some years, and they never offered anything but TERM life insurance. They don’t even give their customers an option. But is that what they do? No! They have over $18 billion dollars in permanent life insurance.
And I could go over many more financial institutions doing the same thing. Once again, what banks recommend to the public and what they do for themselves are two different things.
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 “Financial Independence in the 21st Century” by Dwayne Burnell.
I am ready! How can I start a 770 account? Which companies can open this 770 account?
There are many insurance companies that can do it, but in my experience, there are about 10 companies in the USA that are the best for what you want to accomplish. You can't go directly with the companies, but you will need to find a broker that is connected with those companies. If he/she is a good broker, he will spend some time reviewing your case and comparing results with all companies to make sure you will get the best policy or "770 account" for you. You need to be careful because very few life insurance agents know how to structure these "770 accounts.” You need special riders, etc. Most importantly, the federal government put a restriction on these accounts in the 80’s because they were losing too much money on taxes! So now the government sets a limit for the maximum amount of money you can put in these accounts based on the death benefit you are purchasing. So you want to be right there at the maximum amount you can contribute to maximize your life benefits (not your death benefit). But if you pass the maximum amount line, then it becomes a MEC or a “modified endowment contract,” which means that you lose the tax-free privilege.
If you are interested, please don’t hesitate to contact us. Give us a chance to earn your business, and you will see why we are the best company in the US at structuring “participant whole life insurance” for maximum cash accumulation purposes. We will answer any question you may have with integrity. We work only with mutual life insurance companies that are rated at least A+, and that have been in business for at least 100 years.
We are located in The Woodlands, TX, and we are licensed to do business in most states.
If you have an agent that you trust, you can also talk with him about it; once he prepares a plan for you, I can double-check it and give you an unbiased opinion – free of charge.
To see some examples/illustrations, go to the following link:
For more information, send us an email or give us a call.
We would be honored to work with you.
God Bless you!
Edgar I Arceo
The Hesed Financial Group