Lately I have received calls from a few advisors, consumers and even agents regarding “770 Accounts” so I thought others must have clients asking the same questions.
770 Accounts are sometimes also referred to as “Secret 770 Accounts” or “Presidential Accounts”. You may also hear the term “Infinite Banking”, “Be Your Own Banker”, “Bank on Yourself” and others. I am going to give you a couple of very different takes on it from the resources I have run across and you can make up your own mind. But for those of you who don’t know where this is going, I’ll spare you the suspense. This is life insurance. You can also his response for the best banking procedures.
If you Google “770 Accounts” you will, on one hand, find comments in the vein of the following:
“Manhattan’s Secret Vault: Why Wall St. has kept this powerful secret hidden from you. There’s a very good reason you’ve never heard about the “770” account before: because Wall Street doesn’t want you to know about it! And neither do the Fully-Verfied big banks for that matter. Now, even though this is the investment account The Wall Street Journal is on record as saying is better than 401(k)s and IRAs… the majority of Americans don’t know it exists.”
“Why? Well here’s a clue… I just got off the phone with an insider who works in the 770 industry. This person has worked first-hand with one of America’s biggest financial gurus (a name you’d instantly recognize), as well as several employees from Goldman Sachs and other big investment banks. And this is what this person said to me: NO ONE in Wall Street has their money in stocks—many of them are invested instead in ’770′ accounts!”
“Now, consider what this means… Here are the same investment professionals who’ve been telling us for years to “buy stocks”… and meanwhile… they’re all putting their money somewhere else! Ridiculous. Can you imagine the outrage this would create if most people found out about this? That’s why you’ll never hear your broker mention this investment to you, no matter how much money he (or she) has parked into it.”
On the other hand you will find:
“Here’s how they do it. They take a smidgen of truth and then exaggerate it to a point where the truth is concealed amongst layers of lie after lie. This is the methodology of an increasing number of internet marketers who target seniors or unsophisticated investors. One such marketer has been trumpeting the “secret 770 accounts” for a number of years. They’ve essentially taken a female chihuahua and are marketing it as Kim Kardashian. Yet the two have nothing in common, save for a specious argument that they are both bitches. The only real truth is that this scheme is a dog and an ugly one, at that.”
Wow! That’s a pretty big swing in perspectives. There are seemingly endless comments siding more with one of the afore mentioned or the other. Neither side seems to be very objective.
So, what is the truth?
As is so often the case, this comes down somewhere in between. I’ll give you the bottom line but I am going to gloss over it so superficially that I’ll probably frustrate both sides of the conversation.
At the end of the day this concept is built around the idea of funding a whole life insurance policy to the extent that you can borrow the cash value when you need money rather than go to the bank for a loan. One issue that I have is that what it actually is and what it is purported to be (the second coming of goodness or of evil depending on your take) doesn’t bear a lot of resemblance to each other. It is neither the end all and be all nor is it an outright scam in and of itself.
However, it is important to understand something here: some things may be legitimate while the marketing which surrounds them is scamalous (yes, I just made up that word but I am sure you get the gist). We’ve all seen legitimate products and services surrounded by marketing which is a scam. Heck, the media is a living breathing example of this every day.
Whole life insurance does accumulate cash value. You can borrow from a life insurance policy. It may be a reasonable source of cash when you need it. It does have some tax advantages. And so forth and so on.
However, life insurance won’t stand on its head and spit nickels. Life insurance is a “dollars in, dollars out” financial transaction. There is nothing magic about life insurance though it can accomplish a few pretty important things when well understood, appropriately procured and astutely managed.
I’m going to stay agnostic on whether or not accumulating cash value in a whole life insurance policy is a good idea or not because it depends on so many things. After all, if someone convinced me they actually understood both the advantages and disadvantages of the transaction, was willing to manage it and understood the return on investment, who am I to say if it is a good idea or not, regardless of the return. A lot of things are good for one person that aren’t for another. In fact, I just made a comment this morning to someone about the fantastic movie I saw this past weekend and she told me she had only heard terrible things about it. We’re all different, have differing needs and judge the merits of products and services differently. That is why there are so many different business models. I only care that people understand what they are getting in to and that is where things usually come off the rails.
Much of the marketing I see I would consider scamalous. It makes the stereotypical local, low budget used car dealer TV advertisements look sophisticated and I would chuckle if it wasn’t so sad and dangerous. A lot of people are being duped into something which is not appropriate for them. Again, I’m not saying the idea is fundamentally flawed or worthless, just that a lot of people shouldn’t be in it because either it is inappropriate for them or because they are not getting into what they think they are getting into. On more than one occasion I have seen people’s lives ruined by a bad life insurance transaction and that isn’t an exaggeration. That doesn’t mean everyone will end up in the same boat but if it is even possible, then this needs to be vetted a lot better than it usually is.
What are some clues that make me a little skeptical? As an example, I don’t think that even once I have seen a conversation about the opportunity cost of money. I could pay off my home mortgage but I choose not to because a three point something deductible interest rate in my tax bracket is something I choose to pay while my money is in the market or growing my business. I welcome debt and the interest which comes with it if it gains me an advantage that I am looking for. How can you discuss the horrors of paying interest to a bank without having this conversation?
What about the return on premium to cash value? Again, no discussion. One could put a lot of money into such a plan over a number of years and have a cash value less than cumulative deposits while thinking they have “stuck it to the man”. I’ll go out on a limb and state that it is more likely than not that even after many years the return will be more modest than most participants expected.
Where’s the discussion of what happens when things go wrong? We all know things will go wrong for a percentage of the participants. When it comes to life insurance and policy loans, “things going wrong” have more dire consequences than any other financial transaction I have ever witnessed. Let’s have an even handed conversation.
In a preponderance of the situations I have witnessed, the participant does not have an acceptably thorough understanding of the concept and should not move forward but that doesn’t mean the idea is categorically wrong for everyone. This doesn’t make 770 Accounts/Whole Life Accumulation/Banking Concepts much different than a lot of insurance concepts. Premium financing, split dollar, indexed UL, life settlements, etc, etc… it’s all perfectly legitimate and fantastic for some while being inappropriate and reckless for others.
Forget about the idea for a moment. It is what it is. What I have to consistently remind myself of is that even though this concept is wrapped in some of the most over the top, ridiculous and one sided marketing I have ever seen, it still should be evaluated on a case by case basis and vetted by an independent party with a calculator close at hand. It’s best if this independent party has a good handle on client goals, actually understands life insurance and is open minded but harbors a healthy dose of cynicism.
Summary: not a fatally flawed concept but inappropriate for many. The problem is that the people most likely to succumb to the flamboyant marketing are unfortunately the ones least likely to understand the details, be able to objectively evaluate the program and effectively manage it over time, thus the chance of them being harmed is unacceptably high.