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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