“Strange Disappearances May Hold Key to Retirement in America”
This ad pitch we’re covering today has been through a few iterations over the last year or two — Palm Beach Letter started pitching it as the “770 Account,” then the “President’s Account”, then last Fall they touted it as the “Magic Contract” for 100% tax-free retirement… and now, as we enter a new year, I’m being asked about this again — only now, Tom Dyson and the Palm Beach folks are calling it the “Invisible Retirement Account” that’s helping “millionaires disappear” (“invisible” because the IRS can’t see it).
And yes, it’s still the same thing. A variety of life insurance that earns dividends, has tax advantages, and can include some other features if tweaked in a special way. Read on and I’ll explain more, though I don’t use or sell this kind of insurance and I’m not an expert on the detailed implementation.
What follows is the version we updated when Dyson called this the “Magic Contract” last month, but the “Invisible Account” is the same thing, just a different name. Enjoy!
—from 12/8/14—
The thing that keeps me up at night is retirement. And I’m a long way off from that magical, mystical time when I get to walk around in flip flops in Florida with a herd of dachshunds and not worry about anything anymore.
That’s what retirement is, right?
No?
Damn.
Well, the thing that worries thousands of people who are coming up within a decade or two of retirement age is, of course, having enough money to live when you’re no longer working and bringing in some income. Assuming that we want and can afford to stop working (which many people cannot). That’s why we all invest in the stock market, because even those of us who were not fantastic in math class know that if we’re only going to work for 15 or 20 more years (or less), there’s no way to turn that into a retirement-worthy nest egg if you’re earning 1% a year in a savings account or some super-safe short-term bonds. Not unless you’re suddenly able to start saving half of your income.
But we also have tremendous fear of the stock market. People who are of the age to most likely be thinking about their retirement in the next decade or two, like me, have lived through two very dramatic market crashes as 401k-feeding adults (the bursting dot-com bubble and the financial crisis) that destroyed retirement accounts and scared the hell out of everyone — at least for a few years.
So we dream of a guarantee, and we want safety, and we hope to get returns that are a lot better than have been available in guaranteed savings accounts for the past few years.
And on top of that, we don’t trust bonds because “everyone” says that the bull market in bonds that has now lasted for 25 years is is really officially over. The Fed will start raising rates at some point, long-term rates can’t really get much lower than the recent 1.75-2% (they’ve popped up a bit lately) unless there’s severe deflation (though many of us thought that when 10-year treasuries first dropped below 4%, almost a decade ago, and we were very wrong)… so near-retirees and folks who need portfolio growth are starting to get very worried about government and “investment grade” corporate bonds and municipal bonds, the traditional fountain of guaranteed safety and income for the aging portfolio.
What the heck do you do?
Well, Tom Dyson has a big new ad out for his Palm Beach Letter that says this problem can be cured with a “Magic” piece of paper.
Man, what a relief!
I always knew there was some secret that folks weren’t telling me about, some club they wouldn’t let me join, some joyous cartel of wealth that was eluding me just because I hadn’t signed up for the right investment newsletter. So maybe this is it, eh?
So what’s he talking about? Well, I’ll give you a little taste of the ad “presentation” first…
“… what I’m holding in my hands could make you rich.
“I call it a ‘magic contract,’ because this special piece of paper allows regular Americans and Canadians the ability to retire tax-free… without ever having to notify the IRS or any government agency.
“Currently, our research indicates this is only available in North America. And it’s 100% legal.
“Already, I’ve told several of my closest friends and colleagues about this and, armed with their own ‘magic contract,’ they are now on the path to an abundant, tax-free retirement.
Are you getting our free Daily Update
"reveal" emails? If not,
just click here...“So what’s so special about this contract?
“Well, for one, you don’t have to worry about creditors… (thanks to this contract, your money is safe)…
“You can also pass on your wealth to future generations, free of income taxes…
“You don’t have to declare a dime of your profits to Uncle Sam…
“And, with the right ‘magic’ contract, you can also get a guaranteed growth of 4% a year — about 100 times more than what most banks pay.”
This is a little bit of a tough thing to sell, because most investment newsletters are promising the moon and giving you dreams of an easy retirement from 1,000% winning stock trades — so we’ll give them credit for that, even as we weep for a world in which the hot enticement is for growth of 4% a year.
So what is it? More from the ad:
“Now, this is not some kind of insurance annuity…
“It’s not a real estate contract (there’s nothing tax-free OR guaranteed about that).
“And it’s not a bond or stock certificate, either.
“In fact, this ‘magic’ contract is about as far removed from Wall Street possible. You see, the companies that issue these special papers (I’ve located about a dozen so far) don’t even trade on the stock exchange.
“That’s why the only way you’ve probably heard about this before is if you accidentally stumbled onto it… because your broker’s not going to tell you about it.”
And this “magic” account has been used by heads of state, we’re told:
“President John F. Kennedy had his own ‘magic’ contract…
“So did President Roosevelt. In fact, here’s a paper we found at the Georgia Archives that shows FDR held about $560,000 of his money—over $7 million in today’s dollars—inside this special contract…
“John A. MacDonald, Canada’s first Prime Minister, also had one. As did Senators John McCain, Mark Warner (the richest members of senate), and Vice President Biden.”
And he makes the point over and over that it’s not something you’ve heard of before, or used:
“It wasn’t related to stocks, bonds, CDs, precious metals, or real estate. And although these returns were all but guaranteed over the long term… and one company we found even guaranteed 4% returns… it wasn’t an “annuity” either. (That’s great, because although annuities have become quite popular of late, they’re not the bastions of security they’re made out to be.)”
He also gives some examples of the other famous people who’ve used this “Magic Contract,” even in times of huge investment tumult like the Great Depression:
“Let’s take a short trip back to 1929…
“We’re smack dab in the middle of the Great Depression, and 9,000 banks are about to go bankrupt—and J.C. Penney’s fledgling chain of clothing stores is about to experience the same fate…
“Luckily, J.C. doesn’t keep his money in the bank. He’s got the bulk of his wealth stored in a ‘magic’ contract, which, by 1929, has grown to over $3,000,000 in value.
“But the key question is… is it still safe?
“Yes—not a single dime would be affected during the depression. Thanks to his ‘magic’ contract, James Cash Penney is able to save his business….”
Is this all starting to sound a little bit familiar?
Dyson goes on to call this “Manhattan’s Secret Vault,” telling us that bankers and wealthy families have secretly been putting their money in these “Magic Contracts” for generations, and not telling anyone about it — partly because they want you putting your money into their investment vehicles, or their banks. A deep, dark conspiracy.
And one final bit of Dyson’s inducement:
“… I’m currently earning a 5.5% yield in my “magic” contract, and remember, this is SAFE money that, if history is any indication, is all but guaranteed to go up….
“Don’t forget taxes and fees. For example, a 5.5% “magic” contract (which already includes fees) can be equivalent to a mutual fund that averages a 9.2% return! (That’s assuming a 30% tax bracket and 2% fees, which is only HALF the 4% fee Bloomberg reports as being the average for mutual funds.)
“And lastly, unlike CDs, Treasuries and the like, the money you store in a ‘magic’ contract is not locked up for months and years….
“… if an emergency or new opportunity comes up, you can access your money in your ‘magic’ contract fast. Plus, you don’t have to pay any penalties to withdraw your money!”
So what is this “magic” in the “Magic Contract?” What is this secret thing that Tom Dyson calls “by far the most important thing you should be doing with your money right now?”
Yep, you guessed it, this is the “770 Account” again — he’s teasing life insurance.
But not the regular kind that most of you probably have — he’s not talking about plain vanilla whole life insurance, or even indexed life insurance contracts or universal life, and he’s definitely not talking about term life insurance, which is the inexpensive kind that most of us rely on for catastrophe planning.
Dyson’s Palm Beach Letter has, for 18 months now, been touting the “770 Account” or the “Presidents Account” — we were the first folks to cover that ad pitch, and our readers discussed it for months (including several folks who sell these kinds of policies either explaining details or trolling for customers) as the ads continued to roll.
What they’re really talking about is essentially the same thing that has been promoted for a couple decades now as the “Bank on Yourself” or “Infinite Banking” strategy — there are several books about it from various proponents, and a subset of insurance agents who specialize in this strategy.
What is it? Basically, you buy whole life insurance, also called permanent life (the kind that builds in value and is designed to be held through a natural death in old age, not the kind that gives you cheap immediate death coverage for ten or twenty years so your family can replace your income if calamity strikes — that’s term life insurance)… but in this case, your insurance agent structures it in such a way that you are minimizing the death benefit and maximizing the cash value of the account. If you do this through a mutual insurance company (meaning, a company owned by its policyholders like Mass Mutual or Northwestern Mutual or a dozen or so other big ones — not a publicly traded insurance company like Metlife or Prudential), and you make sure to choose a participating policy, then you earn dividends for your insurance policy from the profits that the company makes.
So it’s a whole life participating insurance policy from a mutual insurance company, with the cash you put in maxed out to get the immediate cash value higher, and to maximize the earnings from the “participating” part — often that cash value is maximized through a rider that allows “paid up additions.” The “bank on yourself” part of it is that some people advocate putting as much money as possible into these policies and then, when you need money (to buy a car, finance a college education, etc.) you borrow from the cash value of your account and pay yourself back over time — so you’re essentially acting as your own banker. Sometimes they continue to pay dividends on the money you’ve borrowed (though usually at a lower rate), and no one earns any interest from you, so it does look appealing on a spreadsheet.
Another way to describe this (and part of the problem with researching this stuff is that every proponent uses different terms, and each insurance agent and company probably emphasizes different parts of the process or explains it differently), is to say that you are buying a dividend-paying whole life insurance policy and you’re overfunding it fairly dramatically in order to maximize your dividends. Really, the point is to have as little “death benefit” coverage as possible without losing the life insurance tax treatment (you don’t want this to become a “Modified Endowment Contract” or MEC, if that happens the IRS essentially starts treating it like a retirement account), and to have as much cash build-up as possible.
Is it “Magic?” No, not really — though I guess a long-term contract that gets you contractual investment returns of at least a few percent a year could sound kind of magical to some (the dividend part is never guaranteed, though several big mutual companies have paid dividends for at least 100 years running).
The problem, really, is that this is a decidedly individualized and opaque process — so it’s very difficult, unless you go to a couple agents and do a lot of scenario planning with each of them, to compare the different contracts (and their riders) and the possible outcomes over the 20-40 years that you’d probably be using this kind of insurance as a savings and investment vehicle. And, of course, there’s a pretty substantial sunken cost in whole life (taxes, fees and commissions depress the cash value most in the first few years), so if you decide this is the right thing for you you really have to understand it well and get it set up correctly in the beginning.
Though these kinds of accounts vary pretty dramatically, the anecdotal experiences I hear from people and see online note that they’re typically best for folks who have at least 5-10 years in which they can make premium payments to fund their insurance at a pretty high cash cost before they really want to start borrowing from the policy — so, folks who are not particularly close to retirement. The whole magilla may not “break even” for policyholders until a decade or so has passed, largely because commissions for insurance agents are front-loaded (meaning, more of the early payments go to compensate the agent who sold you the policy, so the value takes longer to build).
This is complicated considerably by the fact that, although there are agents who specialize in “infinite banking” or “bank on yourself” or other terms they might use to describe it, my impression is that for the most part agents are incentivized NOT to set up “bank on yourself”-type policies — agents, who primarily earn money through commission, earn higher commissions for standard policies than they do for policies that attempt to maximize the cash value versus the death benefit.
And, of course, for these strategies to work over the long term it’s important to be disciplined enough to make the payments (your policy can be canceled if you don’t pay premiums, or you can adjust and use the cash value to pay the premiums — but then your cash value doesn’t rise), and you’d probably be best off with an agent you’re very comfortable with and can follow up with once or twice a year to make sure you’re still on track and are handling stuff like loans and dividends and tax implications properly. And ask a LOT of questions.
I have never had a whole life/permanent life policy, I haven’t seen the need for it, but they are indeed widely held by banks (banks often have life insurance on their employees or executives, and they might also buy it on the secondary market, kind of like a different type of fixed income investment to help diversify their balance sheet). It’s also a big deal for estate planning, primarily because of the tax advantage (named beneficiaries of the death benefit don’t generally owe taxes, as I understand it, and life insurance may also be used sometimes to bypass estate taxes for folks who are above that threshold — roughly $5 million).
The “bank on yourself” stuff is an added level of complexity, since you also have to structure the loans and determine how and when to pay yourself back (or if, sometimes — loans don’t necessarily have to be paid back … though again, policies and contracts differ), and you have to determine whether your policy still pays dividends on funds that are lent out, among other details that can differ. Discipline is important, too, if you’re using this as a wealth compounder — are you the kind of person who’s going to pay himself back if it’s not required?
The whole idea of permanent insurance is, to some degree, a possible way to force savings discipline for people who are relatively well off and don’t have a lot of other solid, tax-advantaged investments available to them — particularly if they also want to avoid stocks and feel the need to have a long-term death benefit (personally, I probably won’t have much reason for a substantial death benefit once my kids are well into their 20s, but every individual has different wants and needs). I personally think of these policies not as a way to invest or “bank” better, but as a way to build a bequest for your heirs while still also growing a cash value that you can tap if needed — though many will argue with that.
But really, read and understand this stuff very well before you walk into an insurance agent’s office with your checkbook. It’s not necessarily a scam, but neither is it necessarily a great fit for everyone — and it’s certainly something that is extremely personalized and may be built or structured in substantially different ways by different agents and using different insurance companies (some of which are scammier than others, I assume). It’s not magic, but it might seem magical when it’s first described by proponents who focus on the strengths of the strategy — so ask around, consider the scenarios, and don’t make rash decisions. This is, at the least, a 10-year commitment if you want to make it work well for you — that means there’s no rush to set ink to paper the first time you ask an agent about it.
I’d suggest taking a look at the two most popular books on this concept Becoming Your own Banker by R. Nelson Nash (Infinite Banking, their website is also here) and The Bank on Yourself Revolution by Pamela Yellen, and there’s also the Lifetime Economic Acceleration Process (LEAP) by Robert Castiglione, though his book seems to be out of print… there are probably others, too.
But if those books interest you, also read the critics so you know what questions to ask or what key aspects might stand out as problem areas for your personal situation, and know that when you consult with an agent, the options you have are likely to be different than the rosy scenarios in the books — and yes, both of those authors and their websites sit astride a network of insurance agents and advisors who pay for the privilege of being an authorized “bank on yourself” or “infinite banking” representative, so you can get into sales pitches pretty quickly.
One interesting critical white paper put out for insurance agents is here from an insurance advisor, and there have been scathing reviews of the plans in those best-selling books by several folks in the media, including this one on Bank on Yourself from CBS News (not necessarily picking on Yellen, that was just one of the more interesting reviews — all the plans have similar critics). There are lots of personal finance bloggers who’ve explored the concept and come up with varying opinions, too — I found this one from Jacob Irwin to be pretty thorough and useful, though his perspective may differ substantially from yours.
So there you have it — Palm Beach Letter is pitching a “magic” contract that really is just participating whole life/permanent life insurance from mutual insurance companies, with the cash value maximized by paid-up additions and perhaps other riders. And yes, if you sign up for their newsletter I imagine they’ll explain it probably a bit better than I have — and I’ve heard that Dyson has also recommended some specific agents, though I don’t know who they are or whether they’d be a good fit for you if you do indeed decide to pursue this strategy. We talked this one to death last time around, including lots of arguments between opponents and proponents, but if you have more you’d like to say on the topic, well, feel free to jump right in with a comment below. Thanks for reading!
Good explanation, thanks.
Just buy term insurance with your $$$ its cheaper !~!
Just another scam out there.
great with marshall law here, banks taking my money with bail-ins, the market crashing you have to go and deflate my last hope–guess i have to go and get my bug out bag and leave now
so goodbye cruel world
Oh–thanks for your explanation
boys and girls, speaking as one who had a with profits annuity from a UK insurer which I bought when I lived in France, there is another risk: the insurance firm goes bust because it fails to make enough money to pay the policy holders. I am not sure what the difference is between British and US deals but they sound pretty similar. I got the policy when I had kids and feared my feckless husband would be unable to cope if anything happened to me, well before I reached, as I later did, the nominal age of retirement. There are similar holes in the coverage US people get with annuities sold by brokers rather than insurance agents, but both lots of course get hefty commissions for bringing on the dummy stock-fearing investor numbers Travis wrote about.
be afraid. be very afraid. but not of stocks.
Geez Vivian, you’re retired?
It’s rare that a mutual Insurance Co. goes bust, the 770 a/c has to originate from a mutual Ins. Co. as indicated. I had a Universal Ins. contract with a non-mutual company, & when bonds nosed dived, the bond’s interest rates kept dropping, but the premium kept rising. A few years ago I had to sell the darn thing, the premium ate my retirement coverage you could say. You & Travis are so right to warn “be very afraid,”
Happy New Year!
A very thorough and sound review. I’ve been very curious ago about the ‘770 Accounts’ for a couple of years, but didn’t wan’t to pay for a newsletter subscription just to find out more. Several financial advisors knew nothing about it, which I’m finding increasingly common that financial advisors have a limited range of financial knowledge.
Your explanation is as complete as any I could have wished for…thanks…
And most of them are broke… Bad combo for an industry where they’re supposed to help people do better financially. Just read an interesting book by a Financial advisor called “5 Mistakes Every Investor Makes and How to Avoid them” where he claims most people lose money by working with a financial advisor because they in general don’t beat the indexes but cost a lot to use in fees and commissions. I totally agree. I’m amazed how many people work so hard to make money then just turn it over to someone who they believe (usually for no good reason) is financially brilliant to “take care of it for them”. I always tell people if they have 20+ yrs to invest and don’t want to study it to just buy an S&P 500 index and think of hiring someone when they’ve got a decent amount to consider.
There’s a wide spectrum of advisors, to be sure — most folks buy insurance through an insurance agent who really knows insurance much more than anything else, but this “bank on yourself” stuff is generally not a core kind of insurance that most people are interested in AND it’s not something regular agents are incentivized to sell.
When it comes to financial advisors in general, folks know that I give Personal Capital a fair amount of advertising space on the site because I like their particular automatic analysis technology, but having an impartial outside person who can give you an honest assessment of your broad financial status, progress and goals can be very valuable. I’d generally suggest to people who don’t know where to start that you should pay a couple hundred bucks for an initial meeting with a fee-only financial planner (their trade group is here: http://www.napfa.org) rather than going in blind with a financial planner who will meet with you for free but is incentivized by commissions to sell you particular products in ways that you aren’t likely to understand at first.
Kewl, we have another Ben here. I suppose I’ll assume the name Benjamin in the future; just please don’t try to flatten us out and take us to the bank as I can not be certified as a 100.usd bill. Have an perpetual, extraordinarily awesome days! Benjamin
I can add something from my personal experience of about 4 years now. You have got the general idea and for the most part explained it well. Bank on Yourself is definitely not a scam, but I agree that you need to do you own research starting with their website and materials from Pamela Yellen. Read the materials, get or borrow her book, and then you can set up a no obligation review with one of their qualified agents. That part is important, because as you said, the B.O.Y. agents are a relatively small group of insurance agents specially trained to set up these programs. I have a relative who has been in the insurance business for many years, but, really knew nothing of this type of program.
I have printouts of how my money has been growing, my agent meets with me at least twice a year to go over how I’m doing and answering in detail any questions I have had. I checked him out with the BBB before committing any money to the policy and have so far been very happy with the results. With the roller coaster ride the stock market has been taking us on, I feel very comfortable slowly but surely adding to my policy while systematically lessening my exposure to stocks. Now at this time, most of my funds are still in the stock market, but each year I’m working to transfer more of it over. I should mention that I am of retirement age, and I started this 4 years ago.
My fiance purchased a new car with cash from our account which we are about to pay off after about 4 years and it was so easy to do that!
A major part of this program is that you HAVE TO MAKE SURE WITH YOUR AGENT that when you take a loan, your money still grows and earns interest as if it is still there. If it’s set up right, this should be a given, but I made sure I asked anyway as I’m a fairly skeptical person also.
This has and is working out for me, I’m getting a steady rate of return of about 5%, taking loans whenever I want or need them and would definitely recommend this type of policy, but ONLY AFTER YOU DO YOUR RESEARCH! The initial consultation should be FREE–and I didn’t feel any pressure from my agent. I made the decision and am happy with it.
Thanks for your perspective — I’m curious, is your 5% rate of return net (i.e., on the full amount you put in?) or is it on the cash value after fees/commissions? Or is it based on something else?
I believe it’s on the cash value (after fees/commissions) Just by chance, though, I
have a scheduled meeting by phone with my B.O.Y. advisor and I will ask more questions
as I always do. He has always been completely up front about everything to do with this program.
Instead of going back and forth with all of these comments, which, I believe are written without any direct experience of the bank on yourself program, why not just go to their website–lot’s of info there for free, and whether your readers decide it’s best to seek out the financial advisors that you recommend, or get a free analysis from a B.O.Y. advisor or both, it would surely answer lots of these questions and speculations.
The BOY site itself says that anyone you speak to will not ask you for anything–no pressure of any kind, just info to allow you to see if it’s for you.
Personally, it has been great for me and I don’t have any personal care or stake in whether anyone decides to pursue this further, I have never posted a comment on any site like this before–just thought I’d say something because of my personal experience and the fact that I know there is a LOT of mis-information about bank on yourself.
No one has ever made any fantastic claims about it, just that you can get steady, safe growth with some other excellent “perks” while building your retirement nest egg.
Also, if anyone is concerned with fees, check out what you and most people are actually paying in hidden fees to the people who administer their mutual funds, 401ks, etc.
Check it out, do some research and you’ll be amazed at how they’re pocketing (over the long run) a ridiculous amount of your hard earned $. Also, to the person who is astounded that whole life policies (including b.o.y.) charge interest to borrow your own money, how about the fact that if you borrow against your own 401k, you will pay about prime + a couple of percent. Isn’t that your money as well?
At least in b.o.y. the interest goes back into a pool which eventually goes back to you in the form of dividends.
Lastly, I know I cannot hope to explain this as well as a qualified adviser; I’m just not qualified to do that, so instead of tearing something down that you may or may not be interested in, just get the info that is readily available without having to subscribe to any newsletter!
Thanks for the input, Harvey.
What ALL these comments leave out is this: The lurking danger from the bank on yourself use of policy loans. The danger is very real…..IMMEDIATE TAXATION ON ALL PROCEEDS taken as a “policy loan” should the policy lapse, be surrendered or otherwise terminated PRIOR to the death of the policy holder. The reason loans are “tax free” is because they are considered an “advance of the death benefit.” Ultimately, only the death benefit is tax-free. Allow the death benefit to expire (from policy lapse, etc.) and ALL proceeds above actual cost-basis in the policy become fully taxed as ORDINARY INCOME. Worse, this would likely hit people when they least expect or afford it and when any remaining policy cash values would be unable to cover the tax liability.
I’m surprised this policy loan strategy has again gained such traction, thinking that the dangers in it had been already thoroughly exposed years ago. So indeed, anyone who embarks on it needs to be very vigilant about understanding what is at risk. Even “innocent” mistakes by family or advisors can upset the applecart years downstream when the policyholder may no longer be able to manage affairs and must rely on someone else. Will they understand it? Will they inadvertently trigger taxation by thinking “oh, dad doesn’t need this life insurance anymore….we’ll just cash it out for what’s left.” Ouch!!!
Good points and insight, Brother Dave — thanks.
is that 5% annually
Care to provide a reference? Harvey? Seems you hit it on the head so why not pass along your agent’s email so we can all benefit?
Do you have to pay the loan back?
I read the book Bank On Yourself and talked with a represenative. Being 60 and single with no kids, it just made no sence to me.
Possibly if you are younger, high income, low spender, and ignorant of the stock market.
Otherwise my thought is to buy a ton of term insurance.
If you’re 60, single with no children or dependants, why would you buy a ton of term insurance?
Dunno. I probably wouldn’t, you’d have to have a good reason because it starts to get much more expensive then and there’s little reason for any “income replacement” insurance. At that age and older, it seems to me that for some people whole life insurance really just becomes a way to put money aside for heirs in a tax efficient way (not saying that’s the best or only reason, or even the best way to hand money down a generation, that’s just my impression).
A good case can be made to “load up” on term insurance (with conversion rights) even at older ages. You do it to create a new “contingent asset. It is using one form of insurance as a kind of insurance against other events.
One reason is the growth and viability of the “life settlement” industry, a market for sale of existing life policies “no longer needed” or affordable for the insured. Many of these policies are simply abandoned, yet could realize a value to the policyholder using this secondary market. Life Settlements create living benefits to the policyholder who wishes to relinquish rights to the policy death benefit.
Another good reason: Few people’s health gets better as they age, often getting worse. So a term policy in later life (again, if it has conversion rights) gives you a hedge against future loss of insurability, and perhaps, buying you time for other assets to mature for retirement. For example, if you intend to delay retirement and continue working, you may want to have life insurance to replace lost earnings if you die beforehand. This is a typical life insurance need, but applicable to almost any age. Another example I had was a client who was a joint beneficiary with his sister of their mother’s trust assets of over $600,000. Only problem was if he should die before his mother, his share went to his sister, not his surviving spouse! A $300,000 10-year term life with conversion rights on his life made sure his spouse got $300,000 no matter what happens. Now that he indeed did receive the $300,000 he can “convert” all or part of that into permanent life insurance protection into retirement….having his cake and eating it, too.
Its all about each person’s specific circumstances and needs. Life insurance is intended to protect and indemnify, not as an investment. Comparing it to an investment misses the mark.
Brother Dave,
I respectfully disagree with your sentiment. If a type of life insurance can be used as an investment vehicle, then who’s to say it’s not or shouldn’t be used as an investment? As mentioned by many on the various threads on this subject, bank on yourself is not a scam.
It should be noted that a “770 account” as stated is a whole or permanent life insurance policy, but not a basic / generic whole life insurance plan. It is a whole life insurance policy that has specific riders for the specific purpose of building cash value (not entirely at the expense of the death benefit as the death benefit does grow over time with paid up additions). Its a way of utilizing your life insurance value while still alive. It is an integral park of the Bank on Yourself philosophy of using money.
If properly structured these accounts do offer a very safe place to keep and grow your money tax free and privately. They build cash value and the death benefit also grows without fees (fees are paid by your premium) and without being taxed (up to the amount paid in premiums). Yes the paid interest rate is modest (it does fluctuate and is tied to Moodys bank rate) but don’t underestimate the benefit of the lack of fees and taxes,. Furthermore having the ability to have a loan using your cash value as collateral and paying a nominal rate back to the insurance company while your cash value still collects dividends and interest (unlike your 401K) sure is better than expensive financing from your bank – You borrow from the insurance company, not from your policy, so your cash vale doesn’t go down and still earns interest / dividends when you borrow. Think of it in terms of any good financial advice will always include paying off high interest debt – in this case you avoid acquiring high interest debt, therefore not losing opportunity. Furthermore because you have a contract with the insurance company, your loan is guaranteed. No underwriting or qualification required – the loan is there (up to your cash value amount) whenever you need it for whatever purpose.
Again, its a different philosophy of using money to your advantage and taking the advantage from financial institutions. As Travis mentioned, read “Become your own Banker” by Nelson Nash for a good understanding of the B.O.Y. concept.
As I mentioned it kindof serves a different purpose than life insurance (although it covers that as well), but If your just looking for life insurance, then yes, term is probably where you should go.
Many Years ago, I was a life insurance agent for a mutual company. What I learned, on my own after the fact, is that whole if insurance works well if you keep it til you die, ( We used to say, Term insurance is “IF” insurance, Whole Life is “When” insurance. More important, whole life was designed to function with a hard currency, like gold or silver, ( notice that JFK and FDR bought their policies when the US was on a gold standard…. now I am going to ask you to go read Ron Paul’s books) something that is basically inflation proof. Even if the internal rates of return are 4 to 5 %, in the long run you get eaten alive on the inflation, Historically these rates are about 3%.
I would personally like to buy a policy that pays in oz of Gold and the premiums are paid in oz of gold. Last time I checked, it is illegal to set up life insurance that way ( It is illegal to set up your own bank with gold as a currency). I also wouldn’t mind buying a policy denominated in Swiss Francs, expecting that the value would hold up against the US Dollar.
I was a whole life insurance agent at one time. I learned it should have been spelled hole life. They pay the agent big front end and continuing commissions. That is why you build cash value very slowly. Once you have built cash value, if you borrow it, they charge you interest. Yes they actually charge you interest for borrowing your own money. Cash value means just that, that is how much equity you have built. You are much better off if you need life insurance to buy term insurance until you don’t need it any more. That is just one former agents opinion.
AMEN! Whole life premiums get insanely expensive after age 65. I just took out the cash before it was all eaten up by premiums and cancelled the policy.
NOW, ABOUT ANNUITIES!
Wife owns a Fidelity Variable Annuity. It is currently worth about $155,000 with a starting value of $80,000. I have read the info from Fidelity about this annuity and my head is spinning! How does she take out money from it? Better yet, can the annuity be converted to an IRA (I understand IRAs) without having to pay income tax?
Thanks for your help!
You raise a great point about the declining value of the dollar (despite its’ recent strengthening) and the wisdom of a long-term contract (like whole life) whose ultimate value is tied to it. I looked into buying Swiss Franc insurance/annuities some years ago.
Should’ve done so when I had the chance. Now it’s pretty difficult….you have to buy it
from an overseas broker (Isle of Mann?). But now even the Swiss Franc is no longer tied to gold and floats like any other currency.
Still, over-funding a whole life contract may be a reasonable choice as part of an overall financial strategy. It would be viable as an alternative to holding long-term govt. securities or corporates, with the added kicker of income tax-free payout as a death benefit. The ROI of the cash element may be comparable to holding bonds, but without the risk of loss in value when interest rates inevitably rise. In this event, the “weakness” of a dollar-denominated asset becomes a strength as that direct risk is borne by the insurance company, not the individual policy holder.
What ALL these comments leaves out is this: The lurking danger from the bank on yourself use of policy loans. The danger is very real…..immediate taxation upon ALL proceeds taken as a “policy loan” should the policy lapse, be surrendered or otherwise terminated PRIOR to the death of the policy holder. The only reason loans are “tax free” is because they get treated as an “advance of the death benefit.” Ultimately, only the death benefit is tax-free. Allow the death benefit to expire (from policy lapse, etc.) and ALL proceeds above actual cost-basis in the policy become fully taxed as ordinary income. Worse, this would likely hit people when they least expect and can afford it and when any remaining policy cash values would be unable to cover the tax liability.
I’m surprised this policy loan strategy has again gained such traction, thinking that the dangers in it had been already thoroughly exposed years ago. So indeed, anyone who embarks on it needs to be very vigilant about understanding what is at risk. Even “innocent” mistakes by family or advisors can upset the applecart years downstream when the policyholder may no longer be able to manage affairs and must rely on someone else. Will they understand it? Will they inadvertently trigger taxation but thinking “oh, dad doesn’t need this insurance anymore….we’ll just cash it out for what’s left.” Ouch!!!
Thanks for your comment, Charles. The importance of the point you are making cannot be overestimated. ANY paper money is essentially the “promise of the government”. I like the idea of “770 account”, BUT: When the time comes to rip the rewards – 10-15 years later, who would be able to say what happens with the fiat currencies, or to be more exact, who can say for sure that in 10 years time modern currencies (US $ icluded) will still hold?
What have you heard or know about index universal life or fixed indexed annuities?
Interesting discussion and review. Years ago, I was an agent for a Mutual Insurance Company with a great record of Dividend Payments. As an Agent, I was able to “play” with the computer(s) to develop several policies for my children that were not “Modified Endowment Policies (MEC’s)” and thus despite some upfront and continuing annual premiums, have grown and will continue to grow throughout their lives and provide them with a very nice retirement fund. Since I’ve transferred ownership, my current knowledge of the actual values is limited, however from what I recall, the Dividends paid annually exceeded the Annual Premium by 6-8 times, so despite the comments above, these policies do work, but it takes time and persistence. I personally looked to purchase a policy for myself at the same time, but frankly my resources in my mid 30’s were insufficient to accomplish that task. I certainly regret that fact, but policy limits and the MEC calculations prevented my acquisition at that time. For the record my children’s base policy started at $ 25,000 and over ~ 20 years had grown to over $ 300,000 through paid up additions with a projected cash value of $ 2.5 M at age 70 (obviously somewhat dependent on market conditions). Still not bad for ~ $ 100/mon premium. Ah the power of compounding coupled with true dividends!
Nice to see the positive comment Dave.
As a current wholesaler for a mutual insurance company I can speak to the effectiveness as well. its basically a spin-off on the Tax Free Retirement book by Patrick Kelly. You fund the policy systematically and an Indexed UL may have caps in the 12-14% rage (at this time). The cash value builds significantly and you take out loans when money is needed later (retirement). The thought is that due to higher caps the client will have a positive arbitrage between the loan rate and the interest credit. So essentially when they pass, the funds loaned just come from the death benefit…thus tax free.
To go a step further, honest agents have ways to “massage” these contracts so that you can fund with lump sums without having to use an immediate annuity as to avoid a MEC situation and some carriers (mine is the only one I know of off hand) can accept a multi-year commission payout as opposed to up-front and it allows the client to build cash value day 1!
The power of compound interest over time is at once the most powerful force available to build wealth and the most difficult to get people to actually take advantage of.
The protections in a life insurance policy have no equal. Good job.
If you are thinking about doing this, make sure you are getting the best policy for you. It is a big commitment – be wise! Here are some pointers: Make sure you are going through a Mutual Insurance company that is rated – AT LEAST “A or A+”. Check their dividend rate against their loan rate. If they are charging you a loan rate (2015) of 6-7% or more, that is probably a little too much.
And finally (VERY IMPORTANT!): You should be able to break even in no more than 8 years. I have seen MANY policies where they break even in 4 years – so it all depends on your age/health and contribution amount. But if it is taking more than 9 years, you are probably not getting the right policy. After breaking even, you should be getting a rate of return of 4-6% tax-free (current dividend scale – 2015).
If you have questions, or if you would like me to check an illustration/contract for you, send me an email or contact me via my website. It will just take me a few minutes to see if you are getting a good policy that will maximize your cash value, or if you are getting a policy that will maximize an agent’s cash value! Free of charge. Why? This is my ministry, and I want everybody to get the best policy they can have. I am tired of bad insurance agents getting rich at other people’s expense.
edgar@arceofinancial.com or http://www.arceofinancial.com
Thank you for the information and the old adage applies, if it sounds to good to be true it is probably a scam. thanks again
Look, I used to BE an agent with Northwestern Mutual Life. It was and is an excellent company for whom the quality of their products was what they breathe night and day.
Life insurance is A tool, not THE tool, with which you need to be familiar in order to take full advantage of the opportunities for building wealth. It is designed to provide superior protection for your interests if you die to soon and to provide protected income should you live too long. It is indeed protected from lawsuits even if you are at fault. You cannot be sued for the cash value in your permanent whole life policy even if you are at fault; yes, it was worth saying twice. You are GUARANTEED 4%. Dividend rates often go much higher.
What used to chap my @$$ so badly was my having spent so much time learning the laws, ethics and standards by which a life insurance agent could do his job for his clients. To see some fry cooks go out and pass the laughable life insurance agent tests that most states offer and then run around burning out 20 year old whole life policies with ‘buy term and invest the difference’ bull$#!t and see those folks have nothing left in two years was agonizing. Most of those policies I saw get raped were not even sold by me but it was still hard to watch.
It has been my experience that ‘buy term and invest the difference’ means buy term and blow the difference on bull$#!t that only costs you money and has a negative ROI.
Please, for heaven’s sake, understand the difference between ‘savings,’ ‘investments’ and ‘insurance.’ They are different animals and they ALL have a place in your strategy. If you are not in a place to have a stake in them all, then savings and insurance are where you need to be, not in the markets.
Naturally…especially…since I am no longer in that business, a regret sometimes, you need to consult with your own professional advisors on these issues before doing anything.
I will make one comment/recommendation, though. If you do not have three months worth of income in cash why in the hell are you worrying about where to invest your money? Emergency fund is square one, folks.
I received a mailing from the Palm Beach Letter offering to let me in on this “secret asset”. Now that I’ve checked with “Stock Gumshoe” and understood that this probably consists of “Whole Life” insurance policies, I realized that my father-in-law, an agent for Northwestern Mutual Life, set up these policies for my wife and me years ago. The value appreciation projections he gave us in those days were based on the high interest rates prevalent in the 1980’s, so the glowing predictions of a high rate of appreciation haven’t materialized as interest rates have declined. Still it must be said that the whole life policies do begin to build significant value over time. The annual premium payments are an enforced savings plan, and the insurance co. a solid, conservative investment fund less volatile and more tax advantaged than the typical stock fund. Term insurance is good for a bread winner looking for temporary security for wife and kids, but it’s like the shelter from a rented house, which ends when the lease is up. Whole life is a somewhat stodgy long term investment that’s there if you need it sooner, and still there when you need it later.
Love your use of signs and symbols to write offensive words without offending. It shows your justifiable anger, but also shows you to be a gentleman who can speak his mind candidly when prompted to. Your in depth knowledge of the subject and respectful concern for the consumer is refreshing. You being a consumer yourself and regretfully needing the help of a more up to date “licensed” professional shows that you are not on a high hose and too proud to ask for help when needed. At the same time you realize that you are at the mercy of catch as catch can trained company reps and independent commissioned reps who may not even have the in-depth knowledge that even you the customer possess, but are in the position to not only to advise you, but to sell you a very complex product that is expensive and a long term legally binding contract. And be expected to plan for the unforeseeable future. With someone with unbiased good intentions. What a trap! But thanks to the crappy economy, what else is there besides low paying taxable bank CDs FDIC insured (how secure is that in the face of a mass collapse of banks) ? At least you and the others above are trying to shed some light on some of the fine points and consequences of having too much money now, not enough to live on later, AND having kids (who are subject to the economy earners) that need a financial safety net and support that “only you ” can provide. That’s the boat most of us are in. Thank you life extending miracle drugs and good sanitation.
just buy term insurnace…you r right !
Have purchased the whole life policies for 9 grandchildren. The dividends pay the premium but they continue to grow. Sadly we had to collect on one of them. You never know what tomorrow brings, but hope they will never be needed again and they will enjoy whatever they cash them in for.
sounds like another scam…
Thanks Stock Gumshoe for another great article.
I am looking back, now, over 47 years. Forty-five years ago, I got the first policy on my new born son, myself, and my wife. With each child, I had a policy taken and additions on myself, as ‘anniversaries’ came up. I was directed to extraordinary life policies and at first there was a slight burden to pay each month. Fast forward 10 years, at a time of high interest rates on everything (15-20%). An A.L. Williams rep wanted me to cash it all in, to buy term and invest the difference. I call my Northwestern Mutual Co agent and he made me see that I was turning the corner on premiums, that the dividends could actually pay the premiums and, soon after, I could buy additional insurance as well. Since then it was easy borrowing for another house. Ever since, the cash value grows, on the dividends. We haven’t made a payment for many, many years. But, we can still see it growing. Kids have been up and out for quite a while, but I could see it as a means to help the grandkids, too. On PBS, a financial person produces a program, during fundraising; I think he is Ed Nott. He suggests life insurance as one means of conveying wealth, tax-free and generationally, with life insurance. It has worked for me, as one who does not invest well and in my earlier years, wasn’t able to save much. The policies and my property acquisitions became part of my retirement package. At 68, we can live comfortably, which means you can focus on your health and well-being. Yes, Travis, retirement is attainable at a comfortable level. The problem with the working man is that we’re in the rut of working, making it hard to give up the paycheck for the comfort of implementing your retirement plan. You’re doing important work with your website, but I hope that you are as lucky as we are to pull the plug and ‘do what you can, while you can!’
I need to ask if I can invest with a note that I carry in the loan amount of 60K,
pleas let me know.
There’s no need to limit your choice to *either* term or whole life — buy *both* in a combination policy. It’s a terrific bang for the buck. For example, you buy a low death benefit whole-life policy, such as $30,000, then to the same policy add a one-year-renewable term-life rider of $120,000. In the event you die, the death benefit is $150,000. Structured correctly, the premiums stay the same for life because a part of the whole-life dividends pay for the one-year renewable term policy rider every year. The balance of dividends can buy paid-up whole-life additions or be paid directly to the policy holder every quarter. Not all insurance companies offer this combination policy, so any initial conversation with an agent should include whether his company offers them.
What bank or affiliation, or person do we contact in an effort to open an invisible retirement account with?
Just saw a video from palm beach letter. Not sure on the complete integrity, but they
have an info program for $39 with a money back guarantee, annual info kind of program, touting the invisible accounts.
Lynn, The irony of you recommending Palm Beach Letter, is that the original article is based on Palm Beach Letter’s “AD PITCH” for this. (If you scroll all the waaaaay to the top of your computer screen, look at the title of the article – just curious if you read it.)
To D Musal, You don’t need to pay Palm Beach Letter $$ just to get the “info” on how to do this, or to find someone to do it for you, that’s the whole point. There are many “banks, affiliations, people” who sell insurance. As for this type of “Banking On Yourself” / “Invisible retirement account” (as some are calling it) it is actually whole term life insurance.
The answer to your question has already been laid out in many of these posts following the original article. Many current and former agents and experienced investors have been among those who have posted comments here, and have shared a wealth of knowledge (IMHO) based on their years of experience. If you take the time and read through all of the comments posted here, you will garner some invaluable information as to whether this is the right option for you, and precisely what kind of agent or company to look for, and how to locate one.
Worth!!! Just hit an ad on this and this explanation is very straightforward and understandable. Thank you so much.