770 accounts -Life insurance: Pros And Cons by David Merkel, CFA of Aleph Blog
A letter from a reader:
My Mom asked me about 770 accounts (apparently, she wants to open one). I’ve reserched [sic] them, but can’t quite figure out if it’s legit or not. So much, what I’ve found is that it is really some kind of insurance policy, it’s tax free, and it’s not openly advertized [sic].
Do you know anything about these accounts? Are they safe? Are they worth it?
We are talking about permanent life insurance here. I’ve written about this at least once before. The types of policies they talk about maximize the savings element inherent in permanent life insurance, and minimize the death benefit. Monies in the insurance policy accrue tax free, and at death they escape estate taxes. What could be better?
Well, permanent insurance is laden with fees, and agents love to sell it if they can, because the commissions are huge. Mortality charges are significant as well. As I often say with this kind of product, insurers love to create complex products because average people can’t tell whether they are getting a good deal or not. (Hint: usually, you are not getting a good deal.)
Life insurance is a very expensive way to manage assets, between the agents and the operating costs of the company. At present, insurance company assets yield more than market rates, which gives a subsidy to customers, but the day will come, like the late 70s — early 80s, where it was very much the reverse.
Aside from scamming the tax man, and providing protection to loved ones at your death, life insurance is a lousy vehicle for building wealth. If you have built wealth already, it is an excellent way to preserve it for your heirs. But it won’t make you rich, and all of those advertising such accounts and those like them, make huge commissions off of permanent life policies if they are the agent. They make out far better than you will.
Are they safe? Yes, life insurance is safe. Are they worth it? No. Not that I am bullish on the stock market now, but under most conditions, the stock market outperforms the returns that insurance companies before expenses, much less after expenses.
This can make a lot of sense if you are rich already, but it will never make you rich. Having reviewed many of the advertisements for these products, they use a Madoff-like technique that tells you that you are being let in on a secret way of wealth. It’s all garbage, because permanent life insurance has been around for over 100 years.
Hey, let me tell you a secret. Did you know that insurance stocks have outperformed most other industry groups over the last 40-50 years? Buffett will tell you, insurance is a great business. Now, maybe I can give this a cryptic name, like a 321 fund, and tell people that owning the 321 fund is a way to wealth. (Psst… the same is true of the stocks of money managers… they do much better than mutual funds.)
Sadly, you would likely do better with my 321 fund, the the 770 accounts, especially if it is held within a tax-deferred account.
Be wary of any pitch that is too good to be true. Don’t buy what someone wants to sell you. Buy what you have researched and want to buy. Oh, and buy the 321 fund — really, buy it. (I feel ashamed.)
THERE ARE NO SECRETS IN MONEY MANAGEMENT! THERE ARE NO SECRETS IN MONEY MANAGEMENT! THERE ARE NO SECRETS IN MONEY MANAGEMENT!
There is no secret club. There are no secret formulas. There are a lot of clever lawyers, accountants, and actuaries that the wealthy employ, but for average people, the high fixed costs won’t make it work.
If you want to be wealthy, you have to run your own firm, run it well, providing value to many. Don’t listen to those who say they have an easy way to wealth. They are lying, and are looking to make money off of you. Those who give you free advice are using you in some way. (Wait, what does that make me to be? Sigh.)
Signing off, your servant David, who does this for his own reasons…