This was originally published on June 3, 2013, and it continues to be one of the most-discussed topics we’ve covered during those years.
The idea continues to be teased and promoted actively by Tom Dyson and his folks at Palm Beach Letter, sometimes using different names, so we’re re-posting it for those new readers who might be interested… the idea is now sold partly as a secret strategy used by Warren Buffett, Joe Biden, Wall Street Bankers, and other notable names… but the basic idea and the type of “bank on yourself” life insurance policy they’re pitching is unchanged (yes, I expect Buffett probably has some whole life insurance, since essentially all wealthy people use life insurance as part of their estate tax planning, and Berkshire Hathaway has engaged in life settlements/secondary life insurance investments in the past).
While you’ll still sometimes see it teased as the 770 Account, or as the “World’s Most Notorious Asset,” it’s mostly now being teased as the “702(j) Account” (just another mysterious-sounding number, like 770, that refers to the part of the IRS code that deals with cash-value life insurance)…
…the story otherwise hasn’t changed much, here’s our original article…
—-from 6/3/13—-
“Imagine an account that…
“Lets you retire 100% tax-free
“Is NOT reportable to the IRS
“Pays you an average of 5% per year
“Has paid out, on average, for 121 straight years
“And which, unlike traditional retirement plans like IRAs and 401(k)s, lets you withdraw money anytime you like, for whatever reason you like, and with no penalties whatsoever.”
That’s what Tom Dyson and a few other folks who sign their promo letters are promising in the latest pitch for the Palm Beach Letter, which he publishes with Mark Ford. It’s all about an account that’s been used by the uber-wealthy for generations, and by “at least six different U.S. Presidents,” including John F. Kennedy and FDR, whose pictures grace some of the ads to provide gravitas, to generate “IRS-exempt” income for retirement.
So what’s the story? Well, Dyson calls it the “770 account” to make it seem mysterious (why else, of course, would you buy the newsletter?), but, frankly, it’s plenty mysterious on its own even if you don’t give it a sneaky name. More on that in a moment.
In fact, this kind of “Account” is already being touted by lots of skeezy-sounding infommercials and books whose promises make you very suspicious — they come with names like “Bank on Yourself” and “Infinite Banking.”
That’s not to say that any of the heavily marketed versions of these plans are skeezy, just that their promises give me that feeling, and the numbers and specifics for plans like this come usually only when you’re sitting in an office with an agent. “Skeezy”, by the way, is defined by your friendly neighborhood Gumshoe as a combination of “sketchy” and “sleazy.”
But what they’re talking about with those plans, and what Tom Dyson is pitching for his newsletter, is life insurance.
Not just ordinary term life insurance like most people under 60 carry, though — we’ll get to that in a minute. First, a bit more of his tantalizing teasing:
“Manhattan’s Secret Vault: Why Wall St. has kept this powerful secret hidden from you
“There’s a very good reason you’ve never heard about the “770” account before:
“That’s because Wall Street doesn’t want you to know about it!
“And neither do the big banks too, for that matter. (More on this in a minute.)
“Now, even though this is the investment account The Wall Street Journal is on record as saying is better than 401(k)s and IRAs… the majority of Americans don’t know it exists.
Are you getting our free Daily Update
"reveal" emails? If not,
just click here...“Why?
“Well here’s a clue…
“I just got off the phone with an insider who works in the 770 industry. This person has worked first-hand with one of America’s biggest financial gurus (a name you’d instantly recognize), as well as several employees from Goldman Sachs and other big investment banks.
“And this is what this person said to me: NO ONE in Wall Street has their money in stocks—many of them are invested instead in ‘770’ accounts!
“Now, consider what this means…
“Here are the same investment professionals who’ve been telling us for years to “buy stocks”… and meanwhile… they’re all putting their money somewhere else!
“Ridiculous.
“Can you imagine the outrage this would create if most people found out about this?
“That’s why you’ll never hear your broker mention this investment to you, no matter how much money he (or she) has parked into it.”
We get a lot more in Dyson’s ad about the safety of these plans, and about how the big banks have tons of their own capital tied up in these plans (that’s true, by the way — banks have massive life insurance assets called “bank owned life insurance” or BOLI, they take it out on their top employees and it’s a large portion of their core capital), and Dyson’s reiteration that he has been putting increasing amounts of his own family’s money (20% of his net worth) into these accounts and getting a safe 5.5% yield … and it’s money that he can take out whenever he wants to by borrowing against it without penalties.
So what he’s talking about is not just life insurance, but probably a specific class of permanent life insurance that’s called “whole life.”
And it’s not really life insurance, not in the way those of us with term life insurance policies think of it (making sure your family’s not destitute if you die when your kids are young, or your mortgage has 20 years to go), it’s more of a wealth protection and tax-avoidance savings policy.
Whole life insurance is an agreement between you and an insurance company that they will pay out a certain amount of money when you die, and the agreement never expires as long as you keep paying the premium. That obviously means the premium is far larger than with a term life insurance policy, since a term policy expires at some point — term life insurance almost never pays out, so it’s cheap. You can pay $25 a month for $500,000 of 20-year term life insurance if you’re 35 years old, which is obviously cheap, but that’s because you’re young and healthy and the insurance expires when you’re 55, well before you reach the highest mortality risk years.
Whole life insurance does have that insurance portion, in that if you die in the early years of the policy there’s a death benefit that probably exceeds the money you’ve put in. But it’s not really for that — it’s set up to accumulate your death benefit over time. So if you want a $500,000 policy and the actuaries think you’ll die in 35 years, your premiums plus whatever returns the insurance company can earn on those premiums will have to add up to $500,000 in that length of time, plus whatever the insurance company wants to make as a profit. Life insurance companies do not generally do crazy investing or earn great returns in times of low interest rates, and they know pretty precisely when their insured people will die (for a large group, on average) so your premiums would likely be pretty stiff.
But that’s if you’re thinking about it as insurance — much of your premium goes into building a cash value for the insurance policy, and if you buy your policy through a mutual insurance company (like State Farm, or many others) that’s owned by the policyholders, and you get a “participating” or dividend-paying policy (meaning you get a dividend from the insurance company when they make money), then your cash balance can compound nicely and provide what are effectively decent investment returns that are indeed tax-advantaged. I don’t know whether the 5.5% gain that Dyson is expecting is typical or not.
Life insurance is often used by families who have some wealth to pass some of that wealth down to the next generation without taxes, and it doesn’t have accumulation limits that I’m aware of, like tax-advantaged retirement plans that restrict the amount you can put in every year — for most people contribution limits are a theoretical concept, but for the upper middle class and the wealthy the cap of 25-50 thousand a year across various retirement accounts is a bother.
So the key aspects of this, from what I can tell, are that you would want to buy whole life insurance, that you would want to have a participating or dividend-paying policy, and maybe even, if Dyson is following the same track as folks like the “Bank on Yourself” people, that you want to maximize the amount of savings you put into the plan (these are often called “paid up additions”) to increase your potential dividends from the mutual company and the growth of the account over time. The maximizing and “be your own bank” stuff is all about putting so much of your net worth into these policies that you do all of your big purchases (like buying cars, etc.) by borrowing from your policy. But of course, to do that you have to be the kind of person who can put a substantial amount of money aside for these large premiums as your “forced savings” plan.
And the reason it’s confusing, even if you don’t call it a “770 Plan”, is that these are complex contracts, they’re not standardized across different insurance companies, and from what I can tell you can only really buy them through an agent, whose commission structure may drive him in a different direction than you want to go. There are many, many variations and riders on these policies that I have only seen briefly mentioned, and I don’t know how most of them work — I suspect that they’re difficult to compare across providers, which is a hallmark of most commission-driven, hidden fee businesses.
Life insurance has a reputation for being riddled with fees, and for permanent life insurance and whole life insurance like this, the articles I’ve read suggest that most of the policies start to make sense after 10-15 years, but they suck up substantial costs and fees that mean you might lose out if you needed to try to pull your money out before that. This is a small segment of the insurance business that’s focused mostly on the wealthy, and the stuff that Dyson seems to be talking about is probably better handled with agents who are specialists in this … preferably those who don’t also happen to market a skeezy “secret plan.”
That is an extremely non-expert view. I don’t have a policy like this and I have not researched them fully, I’m sure there are people with whole life plans and probably agents who sell these plans out there in the great Gumshoe readership who could probably explain it better (feel free to use our friendly little comment box below) — all I can tell you is that Dyson seems to be teasing participating/dividend-paying whole life plans as his “770 plans” (and no, I don’t know what the 770 refers to), and they are real, and I don’t know whether they’re a good idea for you or not.
P.S. As of November 2013 this is now also being teased as “The ‘Underground Wealth’ Account: How to Fund Your Own Worry-Free, 100% Tax-Free Retirement” — these “accounts” were pitched in a different Palm Beach Letter teaser ad that was mostly about silver, I covered that one here on November 7.
Much of the continuing discussion is about being responsible in making regular payments on the Insurance Policy/Vehicle and borrowing and repaying in a disciplined and responsible way. Very good.
If the person/buyer has the discipline to do all this, I would ask why inject a third party (the Insurance company) into the process where the third party is there only to take a significant part of the cash return?
It is possible and easier to do the same thing by opening a discount (online discount?) brokerage account, invest in large-cap dividend-paying corporations, invest by making the same disciplined regular payments into the account, treat any cash withdrawals as loans and pay them back with interest. Be your own banker indeed.
We need to stay with Travis to understand the spin and travesty of much of the Investment Advisory song & dance. Beyond that, find and read ‘Seeking Alpha.’ Read about Dividend Achievers and Dividend Champions. Do not even try to be a ‘Trader.’ Read “TheReformedBroker.com” and “bclund’ on Twitter and in your regular general purpose Email.
Dusty,
This indeed is most of my outstanding question, however, you did not mention non-taxable vs taxable though it might be only fear tactics. So the two main issues seem to be:
1. A certain amount of return is “guaranteed” by the whole life policies, of course the real return in the form of insurance “dividends” are still variable. There is no guarantee of a return or even preservation of capital in stocks or anywhere else. This might appeal to some, not sure yet if it appeals to me and if so in what proportion to my total holdings (if the amount comes out to be lower then I would want to have in the policy to make it useful then that would be a stopper).
2. The difference between paying taxes upfront (regular brokerage account), paying taxes later (IRA/401k accounts) and not paying taxes (borrowing from insurance policy cash value). The market side to this is hard to determine and is relative to how much you have over what period of time and market fluctuations at those specific times. I remember sitting with a financial analyst who asked me a question about prior market conditions being able to predict future, at least in a general sense. And I answered and then he showed me a graph and pointed at a certain 20yr period where there would have been a definite loss if someone had bought and held at the beginning of that period.
3. Estate tax – The gains from the market cannot be passed on without estate taxes. There may be certain shelters which can be utilized, however, ultimately we must prepare for death, then taxes!
I am still not sure the whole life policy is a good fit for me personally but if I were sitting on a lot more assets and the ratios lined up it might be a perfect fit for a portion of my holdings.
3 issues, I said 2, funny?!
WELL WRITTEN, DUSTY.
WHY CANNOT PEOPLE SEE THIS?
Hello everyone,
We’ve been very much enjoyed the number of you who have visited our site after one of your readers posted a link to one of our posts, and we wanted to stop by and offer to shed a little light on this 770 “plan” business.
I’ll start by saying that while we are very much of the opinion that life permanent life insurance (a distinction of life insurance of which whole life is a memeber) can absolutely work as a low risk asset class–and work quite well, we are fundementally opposed to the practice of presenting it as some sort of specialized plan. In fact, the National Association of Insurance Commissioners proposed policy in the early 90’s and was adopted in 49 states (Texas is the only hold out) that would suggest presenting a life isurance purchase as establishing a private 770 (or 7702 as it’s more commonly referred) plan is in violation of the law. I would further argue that if not a direct violation, it certainly is in conflict with the spirit of the legislation, which came about in large part to combat a common practice of selling life insurance as a “pension plan with a free health check up.”
Now that I got that disclosure out of the way…
The use of whole life insurance as an asset building strategy certainly works, and the product can be manipulated in such a way so that the majority of the premium you pay is made up of a rider known as the paid-up additions rider. If you are looking to capitalize on whole life insurance as an asset, you very much want a large portion of your premium to be part of the paid-up additions rider. Or, and this is where it starts to get really complicated, you want your policy to be of the High Early Cash Value (HECV) class of whole life products. Here’s the part that sucks for you the general consumer, you’ll rarely know if a policy is HECV as knowledge on this will be dependent on the agent.
When it comes to whole life insurnace, and I’d like to underscore this because IT’S IMPORTANT, there is a design process known as blending which is generally crucial for optimizing a strategy of whole life as an asset class. Blending is a process of using whole life insurance and term insurance, and for the purpose of building cash value it’s used to increase the Modified Endowment Contract (MEC) limitation placed on the policy. In the interest of keeping this comment shorter, I’m going to skip on the details concerning MEC’s, but one can easily find information regarding what this is elsewhere.
Blending will allow more paid-up additions than would normally be allowed with just a base whole life policy. If this seems a little cryptic don’t worry, there’s a good many things I’ve skipped over in the interest of comment length, so your not dumb, I just haven layed everything out as thoroughly as would be required for you to all understand fully what is going on.
So, it certainly works. Pitching the idea as a 770 plan or any other iteration thereof is, in my opinion, a “skeezy” thing to do and is traditionally a sign of questionable ethics. We’re talking about buying life insurance, we don’t need to run from it and it works really well. But some people know that by making something sound exotic and exclusive, there are some people who will gravitate to it by virtue of their psyche.
When desigend properly the advice many of you might find about these policies not having a positive gain until 10-15 years down the road is incorrect. Properly blended and with paid-up additions will make these policies yield positive returns in about 7-8 years or sooner in some cases. In addition to this, when properly designed, the whole big commitment force savings aspect also largely disappears since a large portion of the premium is paid-up additions the funding of which is discretionary to the policy holder (i.e. you can adjust your premium down and back up as needed)
The 5% average is pretty solid from historical numbers, and I’d say notwithstanding a crazy long (20+ years) stall out of interest rates we can anticipate better than that from a properly blended policy. We have evidence of a policy published publicly on the Bogleheads forum a few years ago that has achieved well over 7%, but keep in mind that policy benefited from being in force in the early 90’s when interest rates were much higher than they are today.
It is true that many Wall St. types own these policies, but I certainly wouldn’t suggest that it’s some closely guarded secret they hoard from the general investor.
It’s certainly beneficial, and it works pretty much exactly like it says it does. But design is crucial and there are a lot of people who want to pay the idea lip service, but sell you death benefit focused policies because there’s a lot more money to be made on that end. So do be critical of any proposal that veers from blended with paid-up additions, and don’t fall for any nonesense of “starting off” with a smaller paid-up additions rider so you can increase (or “grow into a larger”) premium.
I hope this helps.
How do I sign up for the 770 Investment
Speaking from first hand experience, I can very much stand by the the information provided by theinsuranceproblog.com. I consider myself an advanced investor and about a year ago was very close to signing up for a “standard” whole life insurance policy with one of the major carriers (and more importantly with one of the standard agents). I was very fortunate to run into The Insurance Pro Blog and worked with them to design a policy that fits well for me and maximizes my risk adjusted return over the long term. I was able to do this by designing a policy that considered my return first without creating a moral hazard of the agent needing to get a massive commission.
Net / Net – I believe I effectively designed a policy that provides a very lucrative death benefit while also allowing me to generate a ~4.25% tax free IRR over a 20 year period. Not bad for a “component” of my net invest-able assets.
Eric
Can you recommend a company that can provide the structure that you are referring to? I am totally new to this, but have been approached by a Bank On Yourself rep several years ago. The premiums were way too high for me then and I want to ensure that I get the best possible policy as I have very limited income. Thanks! robynbobbin99@hotmail.com
My wife and I have ‘whole life’ type policies that we added to our portfolio about 30 years ago. They never impressed me as a great idea, but solved my need for insurance and we were directed by a family member. So we were an easy sell.
I set all dividends to reinvest and eventually dividends paid the annual cost. They are now paid up and available for borrowing on or just to act as what turned out to be pretty good policies.
They are not suppose to WoW you. Maybe that is something we forget when we are looking at the latest stock idea.
I would recommend of course a reputable company. That can be hard to figure out I think. Mutual companies like mine have something to be said about them. Probably a lot, but I like the ‘cooperative’ idea of them.
Conversely, I had a policy offered at work. A term approach that was simply awful. I picked up a small term policy back before the whole life and have nothing to show for the money that I put in. I have elderly friends who purchased term policies only to have their rates go up when in retirement they could not afford the fees. There were sold apparently by ‘reputable’ and well known planners. So all in all I have to say that I am pleased with our choice.
Speaking as a person who once, many years ago, sold life insurance, I would suggest anyone who is motivated by the death benefit to one’s survivors ascertain how much
of the benefit is just a return of your previous investment. Not different from cashing
out a savings account. Basically, you pay for years, you die, and your survivor gets back
the money you put in (with perhaps a small addition.)
Running the numbers on these situations could be enlightening.
SADLY, CYNTHIA, IT SEEMS NO ONE IS READING YOUR POST.
how can I open a 770 account
need to open a 770 acct
Call David Herlicka at the Herlicka Financial Group LLC in Bedford N.H. 603-622-9062. David Is the best I’ve ever seen at designing these types plans.
please send info on a 770 account
If anyone wants free information on this “770 account” which is not magic, nor vodoo, just plain common-sense economics feel free to follow this link and I’ll send you some information.
https://www.facebook.com/FreedomFSG/app_123077107711598
All right, since there have been quite a few others who have thrown links about, I guess we will, too.
we don’t like the use of the term 7702 plan, or 770 plan. We feel much more ethical just telling you that you are purchasing cash value life insurance and designing it to minimize death benefit and maximize cash value. for those of you who are looking to open a 770 plan. Contact us here:
http://theinsuranceproblog.com/contact-us/
We can walk you through design process.
First of all its is very important to choose a Mutual Insurance company when considering buying whole life insurance. I am a financial advisor at the Herlicka Financial Group LLC in Bedford NH. The top 3 companies are MassMutual, Guardian, and Northwestern Mutual. Make sure if going to buy from one of these companies you ask your advisor about direct recognition and indirect recognition, Very important if you are going to use the policy to create tax free income in retirement! Most advisors don’t know how to sell whole life insurance and they don’t want too, because its the hardest sale to make unless a client comes to them asking about it. It’s so much easier to put a clients money in an annuity or funds because there is no underwriting. I know this because I see it everyday and those individuals get paid faster.
MassMutual, Guardian and Northwestern in that order? That wouldn’t have anything to do with the fact that Herlicka Financial appears to be a MassMutual agency would it?
Oh and it’s called non-direct recognition. And who said people who did this only did it with whole life insurance?
Jeffrey:
Can you give us the definition of “direct recognition” & “indirect recognition”?
Never heard of those terms in insurance policies or investments.
I hae one of these policies after learning about it thru the PBL. (and Mark Ford, his real name). I have owned a term policy and it went up considerbly when I turned 50 (2nd 15 year term). I am now 54.I wish I had done this type of policy 20 years ago. it is a really good vehichle and the company I have my policy thru is top notch (over 150 year old company). The base insurance is not much more than my term, but the cash accelerates due to the way the policy is written. It’s not a complicated confusing complex contract (wow) if you understand insurance types and riders. The math is what really sold.me. I have a guarnteed 5% return in my policy with another dividiend (1.8-3% per year) on top of that. The company has never missed paying a dividend. The money grows tax free (not tax deferred) and there are no annual management fees (like with my mutual funds).
It doesn’t take any complicated formula to figure out that is a real return and not a projected return. It takes only three years (in my policy) for my cash value to pass my premiums paid. That sold me. Cae closed. I would strongly recommend looking at this.
OK, MIKE:
YOU SOLD ME, BUT CAN YOU TELL ME WHAT YOUR TOTAL RETURN FROM THIS INVESTMENT HAS BEEN OVER THE LIFE OF THE POLICY?
I like Mike’s comments on sept. 6, 2013 at 3:00pm. did he ever e-mail you back on total return. also did he mention to you what 150 year old company he is with and who to contact. thanks for any e-mail back for info. I like your comments. I don’t do much on this level. it sounds very interesting.
Jim
Whole Life Policy ‘ cash value’ after several years is great collateral for loans.
This is a topic that’s near to my heart… Take
care! Where are your contact details though?
I am 81 years of age and have a large amount of cash in CDS and paying almost nothing.
What can I do to get a much better income stream on this asset. What can a 770 acct. do for me and my wife (76).
You need an annuity. Contact several of the largest insurance companies and compare what they offer. Be careful about fees. At your age the payout should be quite good.
At age 81 and 76 dont pay a penny to any life insurance co. Invest your money in low cost, high dividend paying ETFS or funds. Vanguard is THE BEST. Their VYM or VIG are peerless.
Both VYM and VIG are good, but not risk-free. Both lost significant value in the 2008 downturn.
THERE is NO RISK FREE! The top 10 companies that make up VYM and VIG if held in
equal proportions are the closest thing to a reduced risk you can get but the index might do better in the long run! It *might*, there is no guarantee.
PS I personally have around 40% of my holdings in these indexes
and around 40% in Dividend Growth stocks and the other 20% in whatever
turns me on. I try to keep sector allocations balanced and position sizes low
(1-2%) so everything is diversified.
At that age I would simply look for a portfolio of good dividend stocks and a bond fund like
xmpt . i don’t know how much you have but a steady income stream is important. I have been buying income stocks for my own retirement to generate the gap in what we can draw down from annuities , SS payments and what we will need to live
I have been researching investing for quite a few years. As an electronic test
engineer formerly with Motorola, Intel, Orbital Sciences, etc. I have tested
quite a few different strategies. The best one I have found is an online
investment strategy with a base return rate of about 5% PER MONTH. Like I said,
some of these positions only last a few days to a few months and you are out
of them. I never enter a position without doing a ‘test’ on it first to see if it is
likely to be profitable. I am not selling a book or even an e-book. I just am
happy to share this idea with others (especially those who do not have the
resources to pay high priced brokers or investment advisors). I appreciate
Travis Johnson’s explanations of some of the ‘wild-eyed’ programs that
people tout that cost so much to get started that they have nothing left to
invest. I am mostly self educated in investment arena and an investment
strategy has to be simple, cost effective, time effective and once it is set up,
be able to run on ‘auto-pilot’. Anyone who is interested in how this works,
they can call me at 480-832-7810.
5% per month is almost 80% per year. that better than Warren Buffet. Would you share your way to invest?
On a web site for the so-called “palm beach newsletter,” the people who promote this stuff have a presentation that claims that the 770 account comes from “the IRS legal code section that allows these accounts to exist.” Umm.. Earth calling: There is no such Internal Revenue Code provision numbered “770”. Per Internal Revenue Code section 101, life insurance proceeds received by reason of the death of the insured are non-taxable, and that’s no big, deep dark secret. Very unsophisticated sales pitch.
I am guilty of having purchased products from both Wade Cook and Charles Givens. Between the two I spent $1400. Some might conclude that I had been ripped off, but I learned enough useful information from both of them that it was worthwhile. Givens made a very simple statement that is worth way more than the combined amount I spent…
“Buy insurance as if you are going to die tomorrow, invest as if you are going to live forever!”
Learn as much as you can about how money works and figure out what the scam is before jumping in. Both of the above organizations were borderline scammish. I don’t go to “fee” seminars anymore specifically because of my experiences with these two. All of the information in their “packages” was also available in their books. For $20 at Borders you could get the same information you got out of the $600 to $800 package.
I have a whole life policy that now has cash value of more than I have put into it.
However, I’ve been paying tax on my premiums….where does the tax free aspect come in?
Dear Sheryl: If you’re speaking of life insurance, I think what you mean is that the payment of the premium is non-deductible for federal income tax purposes (which is correct). The benefit received by the policy beneficiary in the event of the death of the insured person is, per Internal Revenue Code section 101, non-taxable to the beneficiary. That’s where the tax-free aspect comes in.
Dear Sheryl: By the way, if you cancel the policy and thereby receive an amount equal to the cash surrender value at that time, the receipt of those funds is generally non-taxable to you. However, over the years, the payment of the premiums was non-deductible to you when you made the payments — and a portion of the premiums you would have paid would have been reflected as increases in the cash surrender value.
ANOTHER BENEFIT AFTER I’M DEATH. THANKS A LOT !!
WHY DO INSURANCE COMPANIES SELL THE INVESTMENT ASPECT?
BECAUSE THEY CAN. MAKE MORE MONEY.
love forgets all mistakes amen.
Sounds like a “LIRP” to me Life Insurance Retirement Plan. That is worth looking into with a good broker.