770 Accounts have been getting a lot of hype over the past decade. But what exactly are they? And can a 770 Account really help grow your wealth?
What is a 770 Account?
A 770 Account is a dividend-paying whole life insurance policy uniquely structured for cash value. It’s named after Section 7702 of the IRS Tax Code, which outlines how life insurance is taxed. The Tax Code states that insurance policies funded up to a certain level receive favorable tax advantages, effectively serving as tax shelters. The idea behind the 770 Account is to structure a whole life insurance policy in such a way that the policyholder receives the most tax benefits while still remaining within the specifications outlined in Section 7702.
All mutually funded whole life insurance policies receive guaranteed interest payments from the insurance company that underwrites the policy. Mutually funded insurance policies are also eligible to receive non-guaranteed dividends from the insurance company when it performs well. Performance typically isn’t based on the stock market; insurance companies tend to invest in bonds, joint ventures, mortgages, and short-term investments over stocks. Most have paid out dividends every year for over 100 years, even during the Great Depression.
Because your policy earns interest and dividends, the amount you contribute in the form of a premium payment determines how fast your policy grows wealth. Typical whole life insurance policies are structured to have the greatest death benefit for the lowest premium. Because the policyholder isn’t putting as much into the policy, it will grow very slowly. The premiums are almost entirely going to purchase a death benefit for the policyholder’s heirs.
770 Accounts are structured to have the highest possible premium the policyholder can afford with the lowest death benefit. The goal is to put as much money as possible toward the cash value of the policy. This “supercharges” the policy to grow faster and will earn more interest and dividends over time compared to a traditionally funded policy. A traditional policy won’t grow your wealth—it’s essentially just life insurance. A 770 Account is a wealth-building tool.
Tax Advantages of a 770 Account
Why is it that the wealthy seem to pay the least amount of taxes? The U.S. Tax Code is lengthy, complicated, and only thoroughly understood by very few experts. Thankfully, a 770 Account comes with a variety of tax advantages designed to help you keep more of your hard earned money:
- The interest and dividends in your account accumulate tax free.
- The growth of cash value in your account can be used tax free.
- Policy loans are never counted as taxable income.
- Retirement income can be tax free.
- The death benefit of your policy is usually tax free.
- You heirs may not have to pay an estate tax.
Most of the time, your policy will be funded with after-tax dollars. Think of a 770 Account like a Roth IRA but with a lot more benefits. Where a Roth IRA limits your annual contribution, a 770 Account can be structured with increased flexibility to meet your financial goals. You can also use the cash value of your 770 Account at any time, for any reason, without paying a penalty. And a 770 Account comes with a death benefit for your beneficiary.
Benefits Beyond Taxes
In addition to tax advantages, a 770 Account offers unique benefits for you and your family that help keep your wealth both secure and growing. These benefits can be divided into 3 categories:
- Asset Protections
- Policy Loans
A whole life insurance policy is a private contract between you and your mutual insurance company. As such, the cash flow within your policy is private and secure. Storing wealth in a 770 Account is a proven strategy for protecting your family’s assets, your business assets, and your personal assets. Your account can offer you protection in these 4 areas:
Life insurance assets often remain invisible to creditors. Rather than being seized as a collection measure on a defaulted loan, the cash value in your 770 Account can be leveraged to repay any creditors you may owe.
Your 770 Account is shielded from many of the risks that bank accounts or investment accounts are naturally exposed to. Life insurance can help keep assets hidden.
In most states, cash value in your 770 Account is protected from garnishments and seizure that might otherwise be incurred from legal judgements. These assets remain available to you throughout your lifetime and are passed onto your beneficiaries after death.
770 Accounts are protected against bankruptcy and lawsuits in many states. In most cases, they can’t be touched by outside parties, even in the event of a damaging lawsuit.
Your 770 Account can be further customized to fit your financial goals with life insurance riders. Riders are additional forms of insurance that can be built into a policy and tailored to your needs. Some of these riders are free, like chronic and terminal illness riders, which allow you to access a portion of your death benefit if you’re diagnosed with a chronic or terminal illness. A Waiver of Premium for Disability Rider can be added for an extra fee. It waives your 770 Account premium if you become disabled, but your account will still earn interest and dividends as though you were still paying your full premium.
The most important rider for your 770 Account is the Paid-Up Additions Rider (PUA or PUAR). The PUA is what allows you to optimize your 770 Account to grow wealth. Essentially, you front-load your account in the first several years (typically 7 years) with additional insurance in the form of PUAs, maxing out your dividends and interest earnings. A PUA takes your 770 Account right up to the line of becoming a Modified Endowment Contract (MEC)—a term used by the IRS to denote an overfunded insurance policy that no longer receives tax benefits—but not crossing it.
While more expensive upfront, the long-term growth and increased lifetime wealth offered by a PUA strategy make it very appealing. Further, once your 770 Account is “paid-up”, it can often be less expensive than traditional permanent insurance in the long run. You’re no longer paying premiums; the dividends in your account are paying your premiums. Essentially, your account is funding itself.
In addition to increased dividends and interest over the life of your 770 Account, the other reason that front-loading a whole life insurance policy makes sense is that your accumulated cash value is yours to use for whatever you want. The faster you grow your cash value, the faster you can put that money to work growing wealth.
The most common way to use cash value in a 770 Account is through a policy loan. You borrow from your cash value at an interest rate set by your insurance carrier, but the interest you pay doesn’t go to the insurance company—it goes back into your account, plus the payback amount of the loan. Any unpaid interest or loans will be deducted from your death benefit when you pass away.
Meanwhile, the insurance company is still paying you dividends and guaranteed interest on the full cash value of your policy. Effectively, your dollar is serving two purposes at once. It’s earning you money while being used for purchases. (Let’s assume you use policy loans to fund other investments, and that dollar might even be working three times as hard!) A policy loan is ideal for leveraging investments and maximizing retirement dollars.
The 770 Account vs. The 401(k)
Both 770 Accounts and 401(k)s receive favorable treatment under the U.S. Tax Code, but their similarities end there.
A 401(k) is paid with pre-tax dollars and is tax-deferred. You won’t pay taxes on your contributions now, but you will be taxed when you take distributions in retirement, and your heirs will be taxed on anything left over. What that tax rate will be is anyone’s guess. Further, if you need funds in your 401(k) before age 59 1/2, you’ll have to pay an additional 10% fee on top of taxes to access your money. 401(k)s are not very liquid.
Investments in a 401(k) are exposed to market volatility, so there are no guarantees as to how much you’ll have in retirement. You can’t add riders onto your 401(k), so if you become ill or disabled to the point you can’t work, your contributions stop. And you’re required to take minimum distributions at age 70 1/2, even if your investments experienced a market downturn. This can be detrimental to the longevity of your retirement income. Taking a distribution in a down year damages your chances of your funds recovering in your lifetime.
770 Accounts are paid with post-tax dollars and then go on to earn additional tax benefits over the lifetime of the account. You know exactly how much you’ll be paying in taxes because you’re paying them right now. And your family won’t be left with tax liabilities after you die. There’s no guesswork. Plus, you can access the cash value of your 770 Account at any age, for any reason. There is no fee (or credit check or lengthy approval process) for accessing your money. 770 Accounts are highly liquid.
Because they’re backed by mutual insurance companies, 770 Accounts aren’t exposed to market volatility the same way market-based investments like 401(k) plans are. Your wealth is protected and continues to grow until the day you die. Plus, riders offer additional growth and protection options if you become ill or disabled. Utilizing a policy loan from your 770 Account is a great way to fund retirement during a market downturn, giving your 401(k) time to rebound.
770 Accounts for Business Owners
As a business owner, a 770 Account can be a lucrative tool to help fund company costs, keep key employees, and outline a business succession plan.
With a 770 Account, you can use policy loans to cover business expenses and you can use the account itself as collateral for additional bank loans. In fact, some bank loans require you to have a life insurance policy in place in order to receive a loan. Owning a 770 Account gives you a leg up when it comes to financing.
You can also open up 770 Accounts on employees and business partners who are vital to your organization. Commonly referred to as a keyman policy or key person insurance, this type of account provides your company with additional cash value for policy loans, but also pays you a death benefit to help cover the costs of replacing a CEO, CFO, business partner, or other key stakeholder. In some cases, a 770 Account on a key stakeholder is structured so that both the employer and the employee receive benefits. This is called a split-dollar agreement.
All businesses need a succession plan, and small businesses or family-owned companies tend to be the most unprepared when it comes to handling transfers of ownership. A 770 Account offers cash value to keep the business running while the owner/CEO is living and a death benefit to keep the business running after the owner/CEO passes away. It offers a smoother transition and puts the business in a position to enjoy success in the long run.
How to Set Up a 770 Account
Before you start funding a whole life insurance policy, it’s imperative to make sure your policy is designed to meet your financial goals. Most life insurance brokers don’t know how to properly structure a 770 Account for maximum growth. You need an expert to customize the best policy for YOU.
770 Accounts go by a lot of names: 501(k) plan, 701(j) retirement plan, life insurance retirement plan (LIRP), etc. At Paradigm Life we call the 770 Account the Wealth Maximization Account™ and our Wealth Strategists are experts at creating these types of policies. We’ve been helping people build wealth since the Great Recession and have thousands of happy clients in all 50 States. Most importantly, we’ll never charge you for a consultation.
For some people, a Wealth Maximization Account is the very best way to grow and protect wealth. We have clients just starting out on their financial journey, clients preparing for retirement, and clients looking for tax-advantaged ways to leave a legacy for their family. We also have clients who aren’t suited for a Wealth Maximization Account—and that’s okay. Regardless of your financial situation, we’ll work hard to find the right product for your goals.