Financial Hall of Shame: The Secret “770 Account”

Pssst! Have I got a great deal for you!!

We’ve been asked by more than a few clients about “770 accounts.”  These accounts are being pitched by a newsletter writer based in Florida as “Secret 770 Accounts,” favored by Presidents and other VIPs, that magically accumulate tax-free interest and dividends with no tax consequences, letting the owner retire 100% tax-free.

Sounds good?

The Pitch

Here’s how enrolled agent and tax preparer Bonnie Lee described how she first heard of these accounts:

“My nephew recently sent me a link to a website advertising what he excitedly called an “incredible investment.”  It was for a 770 account, and he was ready to jump on the bandwagon. The ad called 770 accounts secret accounts used by banks and the wealthy to earn 30 to 40% more interest than other bank accounts provide.”

Sounds like a good, right? Here’s what another reader reported:

“According to my friend (who read about this in a financial newsletter,) this mysterious 770 account has been used by many wealthy people, including six different U.S. Presidents like John F. Kennedy and FDR.”

The Problem

So what are these secret 770 accounts? Unfortunately, they’re not secret and have nothing to do with bank accounts or any other type of investment. They are simply whole life insurance policies that are being misrepresented by those making the pitch (the name just comes from the IRS Code section authorizing life insurance – some secret).

Of course you can make tax-free withdrawals from insurance policies, says tax expert Lee. But that’s nothing new and amazing, she argues. “You are actually only borrowing your own money from the account, not taking a disbursement.”

But whole life policies are not appropriate or even affordable investments for most people, says investment adviser Steve Yamshon, in a blog titled “Buyer Beware: Secret 770 Accounts.”

“Whole life policies have steep penalties for taking money out. 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.”

The Takeaway

I probably don’t need to tell you that when you combine the words “secret” and “investment” in the same sentence, you’re asking for trouble (especially when the person making the pitch is being paid a hefty commission).

But let’s think clearly. If you need and can afford permanent life insurance to protect you from the risks of premature death, then whole life insurance is a great product. If you need to fund your retirement, then look elsewhere. Life insurance is not the best way to fund retirement for 99% of this country, in part because returns are far too low and costs are far too high.

And frankly, most people don’t even buy whole life anymore to provide insurance protection because they can’t afford it, and get more bang for the buck by buying term life.

So here’s my advice. First, stop reading those sleazy newsletters. Second, if you need insurance protection, shop for insurance. Third, if you’re accumulating and growing your assets for the future, look for a long-term investment solution that doesn’t involve paying steep commissions or sales charges. Sign up for your 401(k), fund your Roth or Traditional IRA, or build a diversified portfolio via a tax-efficient non-retirement account.

And leave the secret investment accounts to the people who like the way they look wearing ankle monitors.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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