For at least the last few years, the Internet has been abuzz about the “secret 770 account” that you simply must make a part of your investing strategy. Well, it’s not a secret — but it should be in your portfolio.
In this case, “770” refers to the section of the tax code covering funds inside a life insurance policy. Using the tax code to name a type of account is common: Think of the 401(k), 403(b) and the 1031 exchange.
Whole life insurance has been used for generations by corporations and dynasties to grow money safely, securely and in a tax-favored environment.
I was taught by financial gurus 25 years ago that you never put any money into a whole life insurance policy, and that theory is still being taught by some big names today. So when a friend whom I respect showed me how to use a life policy to grow and protect wealth, I spent three weeks trying to poke holes in his presentation — and I failed. Apparently, what I “knew” previously about whole life insurance was wrong.
If you are buying life insurance strictly for the protection, many advisers will recommend you buy term because it is much cheaper than whole life in the early years of the policy for the same death benefit. For example, if a 40-year-old man in good health wants $500,000 of coverage for his family, he can buy a straight term policy for 20 years for around $500 per year. The same coverage in a whole life policy might be $3,500 a year.
Financially Astute People Count on Many Benefits
If your main reason for setting up a whole life insurance policy is for the death benefit, that policy will differ from a policy whose main goal is to grow cash. Banks and Fortune 400 corporations have hundreds of billions of dollars in whole life. There are many benefits to purchasing a well-done life insurance contract. In fact, you will not find all these benefits in any other financial product.
- Your cash value balance is guaranteed by the insurance carrier to not go backward, assuming all premiums are paid.
- You will have guaranteed growth every year no matter how the stock market performs.
- All growth and dividends grow tax-deferred inside the policy.
- You have tax- and penalty-free access to your cash through policy loans at any age.
- There are no restrictions on when loans have to be paid back.
- Cash value may still increase even on borrowed funds, depending on the carrier.
- There are no restrictions — personal, business or investment — on using your cash value.
- There are very high limits on how much money can be put inside the policy (though avoid becoming a Modified Endowment Contract).
- It is possible to overcome the cost of insurance in the first few years and have the policy “self-complete” thereafter by paying remaining base premiums out of cash value — with cash value still growing larger
- You can borrow funds out of the policy and pay those funds back with much of the interest getting credited to your cash value, more quickly driving up the cash value.
- You maintain total control of your funds and cash flow.
- Access to the cash value is tax-free for the rest of your life.
- Since all this is done inside a life insurance contract, when you pass from this world, you will leave a large tax-free benefit to your estate (some limits apply).
If you say, “How much is the premium?” I know you are not grasping this concept. I know you understand if you ask, “How much money can I get in the policy?”
Traditional life policies are usually based on the income replacement needs of the insured. Properly designed life policies (or 770 accounts) are built more for the living benefits and less for the death benefit. The more financially astute understand the many other benefits and put as much cash in the policy as possible. The death benefit is the icing on an already fantastic cake.