702(j) plans: The “retirement plan” that needs to retire!

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702(j) plans: The “retirement plan” that needs to retire!
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Have you heard about the secret retirement plan called a 702(j) that the government supposedly doesn’t want you to know about? Here’s why the 702(j) isn’t all it’s cracked up to be…

702(j) plans stink!

You may have heard or seen the pitch for President Reagan’s Secret 702(j) Retirement Plan or something called the 770 Account, President’s Secret Account, Invisible Account or Income for Life.

Whatever the name, it’s being touted as a miraculous tax-free account that pays 40 to 60 times more than your bank; you can withdraw from it at any time, without penalty; you don’t have to report it to the IRS; and it won’t drop in value in the event of a stock market crash.

In reality, 702(j) is just the part of the tax code that deals with the sale of insurance. That’s where this product gets its name from. But the marketers probably hope you’ll get lost in the alphabet soup out there of 401(k), IRA, 403(b), TSP, Roth IRA and on and on….

When you hear talk about a 702(j), what someone is trying to sell you is more commonly known by the names universal life insurance, variable universal life insurance or index universal life insurance.

Clark has long said anything that has the word ‘universal’ in it is radioactive to your retirement plan. First, these plans have huge commissions for the agents that sell them. But the worst part is these policies have enormous fees and often run out of money.

If you can’t meet what’s called a ‘capital call,’ where you have to come up with extra money, your account that you poured all this money into gets wiped out and then you have a giant tax liability on your hands.

Let’s take a closer look at indexed universal life insurance

With variable or indexed universal life, chances are you were promised — with mind-numbing language going on for page after page — that you were in a magic policy that was a savings account, an investment account and an insurance account all in one.

The policy illustrations you saw probably showed you that you’d pay premiums for some time and then magically the policy would take care of itself. It was a magic carpet policy that after a while would fly on its own but you’d have the benefits of the policy.

In practice, it’s hasn’t worked out that way. In one case, The Los Angeles Times reported a man named Philip was paying $25 a month for life insurance over the course of 23 years. He then got a notice that his premium was going from $25 to $510 each month! If he didn’t pay, he would lose everything he’d paid over the years and there would be no death benefit for his wife when he died.

That’s just shameful.
 

5 reasons to avoid indexed life insurance policies
1. The policy illustrations you see are inflated way beyond any return you would get even in the most perfect circumstances.
2. They say you get the benefit of a rise in the stock market without the risk. What really happens is they give you tiny portion of gain of an index they select. They cap the amount you can get, and they don’t give you any credit for dividends.
3. That claim that you won’t lose any money? The conditions you have to meet to avoid losses in down years are too numerous to mention.
4. The fees you pay are gigantic.
5. The commissions the salespeople earn selling these things are monstrous.
 

Why you should buy level term insurance

When it comes to insurance, Clark has always said that you should buy level term instead. It’s simply a death benefit that goes to your survivors. It’s cheap to buy, cheap to own, and you buy it for a period of life you’re trying to protect survivors — usually either 20 or 30 years.

Most agents don’t want to write level term policies because there’s no money in it. You may have to buy on the Internet or from direct writers that don’t use commissioned salespeople. But buy it you should in order to protect your loved ones.

Yet insurance industry research group LIMRA reports that a third of American households have no life insurance to provide for kids in the event of an income earner’s death. That’s a real stunner. Overall, ownership of life insurance policies is at a 50-year low. Of course, not everybody needs it

Does somebody depend on you? Do you have young kids or a spouse or significant other that depends on you financially? Then you need life insurance!

And don’t forget about stay-at-home spouses. Should a stay-at-home spouse pass away, the remaining parent would have to suddenly pay for childcare and everything else a stay-at-home parent does on a day-to-day basis. That’s why it’s essential the parent at home have a policy too.

Keep these tips in mind when shopping…

Buy level term insurance

With level term insurance, you pay one flat rate year after year for the length of the policy. This policy will replace your income should you die unexpectedly. A $250,000 policy for a 35-year-old man can price out for as little as around $3 a week.

But note this well: Level term insurance only provides a death benefit. It does not have a savings or investing component. It’s like car insurance for your life, but instead of buying it annually or in six month increments, you buy it for 20 or 30 years and the premium stays the same during the life of the policy.

Use the Internet to shop for level term coverage

You can comparison shop for quotes at any of a number of sites like Quotacy.com, PolicyGenius.com, 1stOptionInsurance.comInsure.com, AccuQuote.com, or QualityTermLife.com. By shopping online, you avoid an insurance salesperson trying to up-sell you from level term coverage to another insurance product that may be unsuitable for you.

Buy only from companies that are rated A++

The authoritative ratings body for insurance is AMBest.com. Most comparison shopping sites will show you the A.M. Best rating next to the quote.

Know how much coverage to buy

When it comes to the question of how much you should buy, people can get crazy with all kinds of complicated formulas. The simplest rule of thumb says that you should buy six to ten times your annual income.

Only buy through work if you have health problems

It’s better to qualify and go through medical underwriting so you can buy a policy on your own. That’s because most of us don’t stay at the same place forever and you may not have a right to take that insurance with you.

Read more: Top health insurers for 2016

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Theo Thimou About the author: Theo Thimou
Theo is director of content for clark.com. He has co-written 2 books with Clark Howard, including the #1 New York Times bestseller Clark Howard's Living Large in Lean Times.
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