770 accounts -Life insurance: Pros And Cons

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770 accounts -Life insurance: Pros And Cons

770 accounts -Life insurance: Pros And Cons by David Merkel, CFA of Aleph Blog

A letter from a reader:

Dave,

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].

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Do you know anything about these accounts? Are they safe? Are they worth it?

Dear Friend,

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.)

Final Note

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…

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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