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770 accounts: An alternative to a slumping market?

October 21, 2014

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With the stock market plummeting in the United States, a number of investors are looking for a certain and productive place to put their money. One place that is under fresh scrutiny is the 770 account — not really a savings account, but a whole-life policy that some are marketing as an alternative investment tool.

According to the Palm Beach Letter, a newsletter based in Florida that provides information about building wealth, banks keep funneling money into their 770 accounts. This allows them to quietly earn about 4.5 percent to 5 percent interest. That compares with an average return of 1 percent on the typical consumer savings account.

Why aren’t they more widely known?

According to Tom Dyson, an ex-banker and one of the contributors to the Palm Beach Letter, the main reason is that governments restrict advertising these accounts as “savings”, “investment” or “retirement plans,” even though these accounts can be used that way. The reason, he said, is that money can be withdrawn from these accounts tax-free.

According to Dyson, a 770 account works much like a regular savings account. You can withdraw money anytime you want. However, unlike the regular savings account, money here grows much faster. It is because companies that administer these accounts have to pay out 100 percent of their dividends to all 770 account holders.

770 accounts, according to him,  are also a ray of hope during stock failures. Companies that administer 770 accounts are not listed on the stock market. So, these accounts have nothing to do with banking stocks and hence, some say, they are safer than banks.

Some investment advisers however are wary of the accounts, including retirement expert Michael Dallas.  “The fact is that there is nothing called 770 accounts. These are marketing ploys made up by life insurance companies to sell you a whole life policy without mentioning the name life insurance. The 770 accounts has got its name from section 7702 of the IRS dealing with life insurance,” he said.

Bonnie Lee, who represents taxpayers in all 50 states to the Internal Revenue Service (IRS), too has questioned the validity of the 770 accounts.

“In essence, the consumer is using a life insurance contract as a saving account. Once you have funded it sufficiently, you can make withdrawals tax-free. But that is nothing new and amazing. You are only borrowing the money from the account, not taking a disbursement. And according to IRS regulations, loan proceeds are never considered taxable income, whether they are from a life insurance contract, a credit card cash advance or a loan taken for the purchase of a vehicle,” she wrote on Fox Business.

All said, one thing is clear about 770 accounts. They are controversial. Some claim that they have been in use in America for about 150 years and big influential names like John. F. Kennedy and Franklin Roosevelt have been associated with them. So, despite the fact that 770 accounts have been referred to as wealth secrets used by the rich and the powerful, it is better to invest on them only after substantial research. One must make sure that these accounts do not pose any risk in any way.

“In general, be skeptical of any advertising piece that presents a ‘get rich scheme’ or any secret tax-free investment known only to bankers or to the rich. Run the concept before a qualified investment adviser and /or your tax pro before investing,” concluded Lee.

Sonali Sen is a graduate student at the Walter Cronkite School of Journalism and Mass Communication. She also works as a graduate assistant for the Reynolds National Center for Business Journalism.


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