Funding a life insurance contract and borrowing from the death benefit is the process for creating a 770 account. These are named for IRS code 7702(d), and people who borrow against these policies do so tax-free as long as the death benefit is more than cash surrender, notes FoxBusiness.com.
After taking out a loan against the death benefit on a life insurance policy, borrowers have to start paying themselves back by putting the money back into the policy. While the loan is not taxable income, borrowers do pay an interest rate on the loan. When taking a loan out, it's important to find out whether the interest rate is current practice or a contractual rate. Current practice rates can change at any time during the loan, making the liability unpredictable. However, insurers must honor contractual interest rates, according to FoxBusiness.com.
Some advertisers market the 770 account as a clandestine sort of tax-free investment that only the wealthy can access. This is not true, however, as this is just a loan that individuals have to pay back. It's important to talk to a qualified financial advisor and an accountant before investing in this type of insurance policy for the purpose of taking out a loan, advises FoxBusiness.com.