Buyer Beware: Secret 770 Accounts

Caution

Today, one of my clients called me asking about a “Secret 770 Account” that accumulates interest and dividends and is tax-free with the income not having to be reported to the IRS.  Furthermore, according to my client, this type of account lets you retire 100% tax-free. She heard about this so-called secret account from a newsletter writer based in Florida, so immediately I became suspect since I have never heard of such an account.  Really?  If this miraculous way to save and invest was entirely tax-free, it wouldn’t be a secret. Or would it?  So, Michael of our office did a little undercover work and here is what we found out.

It is simply a whole life policy and tactic that salesmen are using in order to persuade people to buy insurance. It is misleading because they have been touting these 770 accounts as bank accounts, but that is so far from the truth and is incredible.

Whole life policies have savings components built-in, and the proceeds do accrue tax-free. You get interest at market rates on the money you put in. The difference is that bank accounts let you put money in and take it out without penalty. Whole life policies have steep penalties for taking money out. However, the money you do take out will never match the money you put in for at least for 12 to 15 years after you bought the policy. With whole life policies, you have to either put in a large lump sum in the beginning or make periodic annual payments for many years. If you don’t make your payments, the policy lapses and you lose 100% of the money that you put in. Insurance salesmen love whole life policies because they earn a commission that can average 9% over the life of the policy. As an investment advisor, if I charged a fee like that for managed accounts, I would be in a cell next to Bernie Madoff. The SEC wouldn’t be too happy about that, but the SEC doesn’t regulate insurance salesman.

Be aware when some salesman tells you they have a product that is secret. Insurance has its purpose and that is for insuring against risk. There are some reputable and honest insurance people out there. If you need one, I know a great one. I say buy term insurance to cover your risks, invest the rest, and forget the secret mumbo jumbo…

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