The Real Story Behind 770 Accounts

What is a 770 Account?

It seems like 770 accounts are some of the latest buzz around the financial world. We’ve had several people asking about them recently, and questioning why they’ve never heard of them. The truth is, there is no such thing as a 770 account, and it is just reference to section 7702 of the IRS code that describes the treatment of the cash value within a life insurance contract.


How does it differ from a 401(k)?

Similarly, 401(k) accounts are named after the section of IRS code that defines the account and their rules. Almost everyone has heard of a 401(k) account; they are simply an investment account that you contribute to on a pre-tax basis, and the money is invested in a variety of investments (traditionally stocks, bonds, and mutual funds) and the money is not taxed until you take the money out. The downside of these accounts is that you will be penalized for taking the money out prior to age 59 ½, and any withdrawals on the funds will be taxed to you as income. And, as with any other investment account, there is always market risk depending on the investments you choose.


A 770 Account is really just referring the cash value within a permanent life insurance contract. This life insurance design differs from a traditional term life policy, as it focuses less on maximizing the death benefit, and more on the living benefits of the policy, and the preferred tax treatment of the cash value within the policy. The policy is structured such that you fund the policy to the maximum allowable per the IRS guidelines, and that money grows at either a fixed percentage, or at a rate tied to an index, which is specified by the type of policy you decide to purchase.


What are the Benefits?

The benefit here is that you can take loans against the cash value in the policy, which, according to IRS regulations are never considered as taxable income. In addition, as long as the policy has sufficient cash value, there are no age restrictions on when you can take out a loan, making it an attractive income source for those looking to retire early and control their income tax liability. Depending on the type of policy, the cash value is also principal protected, and can provide additional cash in the event of chronic, critical, or terminal illness.


Is it Right for Me?

Wealthy investors have been using cash value life insurance policies for over 100 years. In fact, President John F. Kennedy used this type of account, and so did Presidents Taft, Cleveland, McKinley, Harding, and FDR.  It was also noted that John McCain used a policy loan from his life insurance policy to pay for his presidential campaign. While the government does put restrictions on when and how much money can be invested into a Roth IRA, the amount of money that can be placed into a permanent life insurance policy is flexible, and depends upon the death benefit and policy structure.


You should always be skeptical of anyone advertising “get rich schemes”, and the fact of the matter is that this is not one of those. It is, however, a very powerful strategy that can be used to provide tax free income later in life and a tax- free death benefit for your heirs. If you would like more information on this, we would be happy to meet with you and discuss your goals. As an independent and holistic financial advisory firm, we can evaluate whether this is a good strategy for you, and if it is, provide the most competitive pricing for the policy.

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