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770 Account
There is a little known type of investment that has some very attractive characteristics. Most  financial planners do not know about this type of account. Those who do know about this type of account call it by various names: "770 Account", "Income for Life strategy", "Secret Money account", "The Magic Contract", "The Babylonian Money Code", etc.

Characteristics of the Account:

  • The entire program is based on a very specific type of insurance policy called a "participating whole life insurance policy". Participating whole life policies are sometimes called dividend-paying whole life insurance; offered by a specific type of insurance company.
  • There are two types of insurance companies:"stock insurance companies" and "mutual life insurance companies". Stock insurance companies traded on the stock exchanges are not good candidates for this type of policy because these companies answer to stock holders and often make financial decisions to please the investors but that may be bad for the policy holders. Mutual life insurance companies are owned by the policy holders and the decisions made by these companies are only trying to please the policy holders.
  • There are only 35 mutual life insurance companies in the US. The oldest is 177 years old, the average age is 106 years old and 19 of them are more than 100 years old.
  • The agents that focus on this type of account focus on the very best of these mutual life insurance companies and these companies have paid dividends, on average, for 121 years in a row. This includes the worst economic times in the financial markets like during the Great Depression and the 2008 crash.
  • One reason you may not have ever heard of these policies as an investment strategy is because there are laws in place that preclude them from being advertised as an "investment".
  • When you purchase a participating whole life insurance policy, you become a part owner in the company and you share in the profits the company makes from underwriting and investments. The profits are received and dividend paid each year.
  • A participating whole life insurance policy allows you to add Paid-Up Front (PUA) rider to the policy. Which allows you to put more money into the cash value of the policy. Using the PUA also allows you to minimize the amount of commission paid to the agent who writes the policy which means more money goes into the cash value of the policy.
  • There are annual limits to the amount of money you can put into a participating whole life insurance policy. If you exceed these limits, the policy becomes a "modified endowment contract" (MEC) and the profits are taxable. If the policy is not a MEC, then the profits are non-taxable. The objective would be to have a policy that lets you put the maximum cash value in without the policy becoming a MEC. We use the PUA rider to put as much money into the policy as possible without it becoming a MEC. 
  • These policies are very safe because of their track record of paying dividends. The are so safe that many large banks and corporations put money into these accounts as a safe place to park their cash. When a bank puts money into one of these policies, the money is considered a "tier 1" asset on the banks books. Other types of tier 1 assets are cash and gold. This gives you an idea of the safety of this type of account.
  • When the policy is written, it has a guaranteed interest rate that is paid on the policy each year. The typical guaranteed interest rate is currently 4%. This guaranteed rate is affected by the age, gender and health of the insured person.
  • The annual rate of return on these policies average about 5% per year which includes the guaranteed interest plus the dividend paid by the insurance company. This 5% is far better than you can get on a Certificate of Deposit from a bank. This annual growth dividend is tax free. 
  • The cash value of the policy grows or compounds each year is tax-deferred.
  • With this type of policy you completely avoid risk of principal loss. The laws in most states protect the value of the policy from creditors and lawsuits. 
  • You do not have to report this policy to the IRS and it does not show up on your credit report.
  • You can access the cash value of the policy any time without penalty or withholding taxes through a "policy loan". The cash value of the policy continues to grow even though you are using the money for other purposes via the "policy loan".
  • Many financial advisers recommend not purchasing whole life policies because they say the fees are to large. It is accurate to say that in the first 2 years of the policy the fees can be high. The fees in the first 2 years include the commission paid to the agent and the mortality expense charge by the insurance company. As a percentage, these fees can be quite high but in actual dollars they can be much lower than the annual management fees charge by financial advisers to manage your money. One example, compare a situation where put in $50k for years 1 through 4, then $17,500 for years 5 through 50. The fees taken by the insurance company was $17,494 year one, $875/yr years 2-10 and $175/yr years 11-50 for total fees of $34,319. The total cash value of the policy after 50 years was $5.7M. A comparable example of investing the same amount of money in mutual fund that is assumed to pay out the same return with a 1% management fee would cost $727,311 in fees and total value would be worth $3.9M. The reason for the big difference is that the fees on the insurance policy are front end loaded but the management fees on the mutual fund is 1% per year which means the actual dollars paid in the latter years can be quite high. 
  • The estimated return of 5% per year on a policy may actually be conservative. About 65-80% of the investments that the insurance company make with the funds from these policies is in bonds. Currently the bond market is at at historical lows right now. If bonds go higher, the annual return will be higher.
  • You have several option each year when you receive the dividend from the policy (received on the anniversary date of the policy). You can: allow the dividend to remain in the policy to compound by purchasing another PUA, elect to take it as cash tax-free, use it to reduce a policy loan, or it could pay your policy premium.
  • Typically in the first 2 years, the annual rate of return is a negative number (what you have put into the policy vs cash value of policy) because commissions, the mortality expenses and other fees. But then it goes positive and stays that way.
  • What you contribute into the policy (your payments) and the dividends are tax-free. Evidently you do have to pay taxes on what you withdraw beyond your payments and dividends (call this the taxable portion). You can legally avoid the taxes on the taxable portion by taking out policy loans rather than withdrawing funds. You don't pay back the loan but it is paid back on the payout of the death benefit on the policy.
  • By using the PUA, which lowers the death benefit as much as possible, you can slash the insurance agents commission up to 70%. This reduces expenses and increases the cash value of the policy. It may be able to reduce the fees down to 30-40% of the first year premium.
  • When you purchase a participating whole life insurance policy, you will have to continue to make policy payments. So don't open it unless you plan to keep the policy for a lifetime. Because of the initially higher commission in the first year, you will lose money if you cancel the policy after just a few years. After some time, usually four to seven years, the annual returns will be large enough to pay the annual premium payments. At that point, the policy basically covers itself. The insurance jargon for that is ‘automatic premium offset.’ 
  • In the first several years the policy is held, the return rates is not that good. However, the longer the policy is held the better it gets. After about 10-11 years, it gets close to the 4% return in the policy quote examples that have been reviewed. Returns on policies for older people, for example, aren’t as great as they are for younger people.
  • With a participating whole life insurance policy, the cash value will never exceed the death benefits in order to stay within the IRS guidelines to stay below the MEC.
  • Mutual life insurance companies invest in bonds. They rarely trade in and out of them but rather hold them to maturity. If you invest in bonds that are safe and hold them to maturity, it doesn’t matter if a bond’s price fluctuates. You’ll collect interest along the way. Then, when it matures, you’ll get your principal or original investment back. It doesn’t make sense for mutual insurance companies to invest in bond funds. Bond funds trade like stocks, so they have stock market risk. Bond funds also usually come with management fees, which eat into overall returns.
  • A list of some of the Mutual Life Insurance companies that offer these policies: New York Life, Security Mutual Life, Lafayette Life Insurance Company, Guardian, One America, Ohio National Financial Service, Union Central, Northwestern Mutual, Mutual Trust.
  • Some of the mutual life insurance companies offer service called a "Premium Deposit Account" (PDA). The PDA is a great place to park your cash If you have the cash up front to pay for the policy until the policy is self-funding. The PDA pays an annual rate of return for 3-3.5%/year.

Here is a list of insurance agencies that are experts in the participating whole life insurance policies:
Paradigm Life is the agent recommended by one well known financial news letters. Research has discovered that Paradigm Life offers policies from several of the top rates mutual life insurance companies. It is not clear at this time if the other two insurance agencies offer policies by multiple mutual life insurance companies. So do your own research.

The forum post called "Critical difference between savings and investing" (click here to read it - talks about asset classes that fit the savings profile. You might consider using the participating whole life insurance policy as another asset in this same class since it is considered a "tier 1" asset by banking regulators.


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