海角大神

Every investor wants to maximize returns and minimize losses. So it鈥檚 no surprise that there鈥檚 been buzz recently about a retirement account, often called a 702, that promises to help achieve that goal, paying a guaranteed return of up to 60 times the standard bank account 鈥� tax-free.

NerdWallet鈥檚聽Ask an Advisor聽forum has seen its fair share of聽inquiries聽about such an account, sometimes referred to as a 7702 or 702(j). People want to know how to open one, what it is and whether it should replace their 401(k) or IRA.

It鈥檚 clear why the description of this account, currently being promoted聽in flyers and books by an organization called Palm Beach Research Group,聽is catching interest. The group calls it a way to 鈥渞etire with an extra $4,098 per month, tax-free.鈥� It says that this is an account used by 鈥淲ashington insiders鈥� and billionaires, name-dropping Bill Gates and Warren Buffett. The message: Don鈥檛 you want to be in that crowd?

As it turns out, you probably don鈥檛. Advisors on NerdWallet鈥檚 forum, for instance, have consistently聽chimed in聽that this isn鈥檛 the holy grail it is purported to be. (Palm Beach Research Group, which publishes various types of financial advice,聽didn鈥檛 respond to NerdWallet鈥檚 request for comment.)

In fact, it isn鈥檛 a retirement account at all; it鈥檚 a life insurance policy. The name, like IRA or 401(k), comes from a section of the Internal Revenue Code 鈥� in this case section 7702, a portion that regulates life insurance contracts. The intention, it seems, is to put a tax-code name on a聽permanent life insurance policy聽in an effort to associate it with retirement plans.

Understand permanent life insurance

Permanent life insurance policies are designed to provide coverage for the rest of your life, and also contain a cash value component. Part of your premiums go to this account. Over time, the cash value account builds up, and you can borrow against it.

A 702 is sold as a permanent life insurance policy that you overfund by paying higher than normal premiums, more than is necessary to keep it in force. You then borrow from the policy鈥檚 cash value during retirement, paying no taxes because such loans are tax-free. That鈥檚 why those who sell 7702s tout them as a way toward a tax-free retirement: The loans generally do not need to be paid back while the policyholder is alive. They鈥檙e repaid out of the death benefit after the policyholder dies.

Evaluate the risks

But taxes shouldn鈥檛 be your only consideration when retirement planning. 鈥淚t鈥檚 important to evaluate this or any retirement savings option in the context of your overall situation, rather than just fixate on the potential tax savings,鈥� says聽Roger Wohlner, an independent financial advisor and blogger.

This 702 strategy has many risks. If you don鈥檛 pay back the loan, any investment gains borrowed could become taxable. If you die while a loan is outstanding, it will be repaid out of the policy鈥檚 death benefit, reducing or even eliminating the amount your beneficiaries receive. Interest may聽also be charged on any outstanding loan balances. And much of the premium you pay into these policies is eaten up by high commissions and fees.

Compare to retirement plans

Putting your money into a permanent life insurance policy as a means to save for retirement could also mean diverting assets away from a 401(k), where you may get an employer match, which actually is a 100% guaranteed return on your investment. It could mean losing out on the tax deductions you鈥檇 get by instead making contributions to an IRA or 401(k), or on the tax-free growth offered by a Roth IRA. And it may mean missing out on at least some investment growth, because while these contracts sometimes guarantee you won鈥檛 lose principal, they may also put a cap on returns, which means you wouldn鈥檛 capture some of the growth brought by聽big market years like 2013.

鈥淪ome insurance agents love these, but it鈥檚 an expensive way to invest and accumulate assets,鈥� says Wohlner. 鈥淚鈥檓 not saying it鈥檚 a scam, but it鈥檚 nothing new. Call it whatever you want 鈥� you can put boots on a pig, but it鈥檚 still a pig. People should go into it with their eyes open and compare it to other options.鈥�

What other options might those be? The aforementioned 401(k) and IRA, to start. High net worth individuals 鈥� frequently the targets of 702 sales pitches 鈥� who have maxed out those accounts can move on to taxable accounts; those who own their own businesses could start a pension plan.

The bottom line

If you decide you want to include聽life insurance聽as part of your retirement planning, purchase it from a trusted broker (and ideally, a fiduciary) and be sure you鈥檙e aware of all fees. If you don鈥檛 understand something, you shouldn鈥檛 buy it 鈥� or you should at least consult a financial advisor about whether it鈥檚 the best choice for you. There are no get-rich-quick ways to fund your retirement, other than hard work, careful planning, and early and consistent saving.

Arielle O鈥橲hea is a staff writer at NerdWallet, a personal finance website.聽