Leveraging Life Insurance to Build Tax-Free Wealth with Will Duffy – EP 102

Interview with Will Duffy

Will Duffy - Roths for the Rich

Leveraging Life Insurance to Build Tax-Free Wealth with Will Duffy

You can’t put a dollar value on your family. But you can make sure their financial future is taken care of in case of unexpected events. Nowadays, we’re sold on the idea that banks are our best bet to do this.

That’s simply not true. Banks only have their interests in mind. And, contrary to popular belief, they’re not bulletproof and can go under. Luckily, there are ways in which you can take care of the financial security of your family and create wealth at the same time.

That’s why you have to listen to today’s episode with my guest, Will Duffy.

Will is a Chartered Financial Consultant (ChFC), Retirement Income Certified Professional (RICP), and Enrolled Agent (EA) who became a millionaire at age 33 by following the same contrarian wealth-building and tax-saving strategies he teaches his clients. His proven roadmap helps clients realize their financial goals and secure the future of their families.

In this episode, you’ll learn how the wealthiest people in the world leverage life insurance to build tax-free wealth, the major mistakes to avoid when using life insurance as an investment vehicle, and the bank replacement strategy with much better returns.

Featured on This Episode: Will Duffy

✅ What he does: Will Duffy is the founder and creator of The Duffy Method: How Money Really Works™, Will’s proven roadmap to help high-net-worth individuals, family offices, and businesses realize their financial goals. Will became a millionaire at age 33 by following the same contrarian wealth-building and tax-saving strategies he teaches his clients. Not just a financial advisor, Will’s specialized excellence as a Chartered Financial Consultant (ChFC), Retirement Income Certified Professional (RICP), and Enrolled Agent (EA), lets him create customized, innovative financial plans or partner with a client’s current team of CPAs, advisors or attorneys. He is the author of multiple financial books and a go-to source for other financial professionals nationwide.

💬 Words of wisdom:  “When something happens to your health, you can’t erase the past.” – Will Duffy

🔎 Where to find Guest Name: Will Duffy on LinkedIn

Key Takeaways with Will Duffy

  • Why the wealthiest people in the world are the largest purchasers of life insurance.
  • Why the “infinite banking” and “bank on yourself” strategies don’t work, and better alternatives you can use instead.
  • Will’s bank replacement strategy that will get you guaranteed returns on investment regardless of recessions, stock market crashes, and depressions.
  • The #1 mistake to avoid when using life insurance to invest.
  • The strategy that life insurance companies don’t want you to know about that helped Justin save millions of dollars on his life insurance policy.
  • Why do the size and investment portfolio of life insurance companies influence the dividend you’re earning with their policies?
  • The benefits of life insurance that aren’t activated only by death.
  • Nobody’s promised tomorrow. Why it’s always better to get life insurance as soon as possible.

Will Duffy | A Strategy Worth Millions When Borrowing Against Life Insurance

Will Duffy Tweetables

“I want to make it so that the last thing that my wife has to worry about is money. She’s going to have everything else on her plate. And so, having life insurance ensures that that won’t have to be added to her list.” - Will Duffy Click To Tweet “If I can learn from other people’s mistakes and not learn from my own, that would be much better, but you’ve got to learn from your mistakes as well.” - Will Duffy Click To Tweet


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Read the Full Transcript with Will Duffy

Justin Donald: Well, what’s up, Will? So glad to have you on the show. We’ve been talking about doing this for, like, I don’t know, a year, two years, year and a half, something like that.


Will Duffy: Yeah, I thought the day would never arrive, but here we are. I’m excited to be here. Thanks for having me.


Justin Donald: This is really cool because a lot of people that I have on the podcast are people that I look up to, I respect, I admire. And then there’s a small percentage of people that I actually already work with. They’re the expert that I pick over everyone else. And that is you for me in the world of anything and everything, life insurance. And so, I’m excited to dig into that.


But before we do, I think it’s really important to note that what we’re going to talk about today most people don’t know of. I mean, the type of strategy that we use is something that most people have never heard of. Most agents that actually sell life insurance have no clue what this is or how to do it. And this is just such a creative way of taking a policy because I mean, I think we both agree a lot of the off-the-shelf policies are really not that great. You really need a specialist that can kind of come in and tweak and do the things that need to be done with the right riders and the right chassis and all of that. So, we’re going to get into all that.


And I also think it’s kind of cool that I had at least some general understanding and knowledge prior to meeting you. And I would say I was way ahead of most people at that point in time. And you schooled me in all the things I didn’t know because I had a policy that probably was better than a lot, but nowhere close to as good as what we’ve been able to create, what you’ve been able to put into play.


And so, I think it’s important that people recognize what they think this is. It’s probably not. And anyone listening, anyone watching this, this is probably a strategy you’ve never heard of. You probably don’t know very many if any people that can actually implement or create this. So, I’m excited to dig into that.


Will Duffy: Yeah. Can’t wait. I think it’s going to be very educational for everybody.


Justin Donald: Yeah. So, question for you, Will, how did you even get into life insurance? Like, you didn’t go to college and say, hey, I can’t wait to sell life insurance, I don’t think. And I know you do a lot of other things. And I really am trying to be specialized here today because you are big in tax strategy and you love that. And we could go down that rabbit hole.


But I really want to stay consolidated on just one major idea, one major product that someone could implement that that single thing could be the biggest game changer they’ve ever done. And so, hence the reason I want to focus on the bank replacement strategy that we’ve been able to employ in my life, and then obviously, with a lot of people in my mastermind.


Will Duffy: Yeah. So, how I got into this is I’ve always had a desire to look into both tax strategies and wealth efficiencies. For me, those are two things that if people focus on and kind of fix in their own financial system that are going to have an immediate return for them. And so, you can’t research tax strategies or wealth efficiencies and get too far without coming across life insurance. And so, that was kind of the genesis of how this all started. And it’s been about a 14 to 15-year journey ever since and excited to kind of give everybody the Reader’s Digest version of where we are today.


Justin Donald: And I think it’s a good point just to throw out there to start things. When you say, hey, I was looking for tax strategy and figuring out the best way and most effective way to help people minimize their tax burden, when you think about insurance, this is one of the single greatest tools because it has one of the most favorable tax code provisions. So, like when you think about life insurance, most people don’t realize that this is the only vehicle that exists that has tax-free growth, tax-free distribution, and tax-free death benefit. You don’t get that in anything else. And so, there’s just so much legislation and IRS tax code that supports this vehicle, right?


Will Duffy: Yeah, absolutely. So, this is one of the few remaining completely tax-free vehicles that are available to people. Unfortunately, it’s just misunderstood, or people have been put into bad products, poorly designed life insurance policies, and so, they’ve had a bad experience, but it doesn’t have to be that way.


Interestingly enough, life insurance actually predates the tax code. So, life insurance is around 200 years old and the tax code is a little bit over 100 years old. I think it goes back to 1913. And so, yes, this is something that was dealt with when they originally wrote the income tax code that we have today, the Internal Revenue Code, and it’s something that has been protected ever since. And so, yes, the tax benefits are pretty significant. That’s not the whole story, but it’s the beginning of like, okay, I really need to look at this. And it’s why, interestingly enough, you find wealthy people that take an interest in life insurance. Most people think, well, if someone’s really wealthy, they don’t “need” life insurance, but actually, it’s the wealthy that look into life insurance because of the tax benefits.


Justin Donald: Yeah, it’s interesting because when you think about like who owns life insurance, it’s most certainly the wealthy, it’s most certainly the people that are in Congress. And a lot of people don’t realize, like the people that vote on what stays in law or what changes, like these are people that themselves are heavily invested in this particular, I don’t know if you can call it an asset class in this particular vehicle or type of vehicle, and then also the largest institutions, the largest companies, the largest banks. I mean, these are the purchasers of life insurance, and specifically, this type of policy.


So, it’s kind of interesting to look when, I remember someone said, you don’t want to get into life insurance, this is way back when because I started early. And for me, it was just this realization that I didn’t want to follow what everyone else was doing, that everyone else was like, I kind of wanted to run in a different path because I notice that what most people are doing isn’t smart financially, but everyone in my circles like, oh no, don’t do that. That’s not a good investment, by term and invest the rest, invest the difference. And I’m so thankful that I didn’t take that strategy because when you truly look at who owns these types of policies, it is the wealthiest people in the world.


Will Duffy: When you figure out what it is that these people know, that’s the key. There’s obviously something that the banks and the large institutions and the wealthy individuals and wealthy families, there’s something that they know, which is why they put such a significant amount of wealth into life insurance policies that have a cash value. And I think once you figure out what that is, we’re going to cover a lot of that today, you’ll quickly realize, okay, this is something I need to do as well.


Justin Donald: Yeah. Love it. Well, very cool. Well, let’s dig into it because this strategy, you call it instead of looking at, I think there’s sometimes a negative connotation or a misunderstanding when you just talk about life insurance. And I think if you look at it instead of the vehicle that it is, but rather like the potential that it brings, like what it actually creates for you, it helps to define what that strategy actually looks like. And so, where did this idea, this term bank replacement strategy come from? Because this is something you coined a while ago, and I think it’s really catchy, I like it.


Will Duffy: Yeah, for sure. The name is important. So, again, this is the bank replacement strategy. The reason I had to come up with its own name is because there are other strategies out there that many of your listeners probably have heard of and I need to separate it from those strategies because it’s very, very different. So, I’m going to give out those names. You may have heard of something called infinite banking. You may have heard of something called bank on yourself. You may have heard of something called becoming your own banker. These are all different names for a strategy that’s very, very different than mine.


And in my opinion, the infinite banking, bank on yourself strategies out there, I’m actually not a big fan of them. They’re not the worst thing in the world, but they have a lot of issues with them that I believe I’ve solved, and so, hence the name bank replacement strategy. And so, for anybody out there who has heard of these terms before, maybe they looked into them in the past, didn’t really think that it was for them. Maybe they even tried them and had a bad experience. I’d encourage you to just have an open mind here because the bank replacement strategy, my strategy is different. It does solve most, if not all, of the issues with these other ones that you’ve heard about online.


And from a high-level standpoint, Justin, the bank replacement strategy is this, a bank is what the majority of people utilize for their liquid cash position that they have in their life. It’s a different number for everybody else, but they utilize a bank account, and so, it’s called the bank replacement strategy because there’s actually something better than a bank account for your cash, for your liquid position that you keep, and for the money that’s coming in and out of your financial system through investing. And so, that’s really all this is, is to simplify it.


I love to start high level before we get into the details. To simplify it, it is an alternative to a bank account because a bank account does not excite that many people. That’s going to give you the same protections, insurance, liquidity, access, etc., that you get in a bank account, but it’s going to give you an account that’s going to have better benefits, higher return. That is from a high level, the purpose of the strategy.


Justin Donald: And when you say it gives you better return, one thing that’s really interesting that I think a lot of people miss is with this strategy, there’s actually a guaranteed return. So, with the stock market or with different investments that you make, there is often a return. That return can fluctuate. If that return happens to be negative one year, it throws off the overall return, whereas this one has a fixed minimum guaranteed return no matter what, but the potential to earn more with a strong dividend every year. And so, I think that’s important also to kind of elaborate on.


Will Duffy: Sure. Yeah. So, everybody knows that the return in a bank account for the last many, many years has been almost nothing, right? It’s usually zero point something. So, we’re talking pennies here, and that’s a taxable return as well. If you get a 1099-INT for the little bit of interest that you get while your money sitting in a bank account, on the life insurance side, you’re correct. The insurance policies depending on which company utilize which policy you have will come with a guarantee. Those guarantees were actually changed recently due to some legislation.


And so, now, I’m going to give a range. The range is usually between 3% and 4%, is the guaranteed return on these different types of life insurance policies. And so, that’s important. That right there is significantly greater than a bank account. And I also like to point out to people that that’s also a tax-free return, which is significant, especially if you’re wealthy, if you have high income, if you’re in the top tax brackets. That does play into things.


I had a client back in the day. He was looking at a life insurance policy with me. He was in the top tax bracket, which at the time was 39.6 and he was a resident of the State of California. At that time, he was in the 13.3 tax bracket. So, he was in a tax bracket of over 50%. And so, even in a situation like his, let’s say his return on his life insurance policy was over three, that’s a situation where he would actually have to have find some bank account somewhere that actually was paying him over six to net the three because of the tax-free benefit. So, yes, the return for most people’s situations, again, assuming they’re insurable and healthy, is going to be far greater than a bank account, but it’s also going to be tax-free, which makes that benefit even greater.


And then you touched on dividends. Dividends are really kind of the key to a life insurance policy. If you look under the hood of a life insurance policy, you kind of want to see what’s the engine. Really, the engine is that dividend. And so, understanding how the dividend works is important. We only utilize life insurance companies that have been paying dividends every single year for over 100 years straight. That shows they have the ability to pay a dividend through tough times, market crashes, recessions, great depressions, all kinds of things. And so, that’s very, very important.


What that dividend is going to do is that’s going to help people reach an IRR on their policy over time of something in the neighborhood of 5% to 6%. So, this particular strategy, I tell people to plan on assuming again that they’re healthy and it all works out a 5% to 6% IRR on the policy over time. Again, that’s a tax-free return, blows any bank account out of the water.


Justin Donald: Yeah. And then for the people that immediately say, oh, well, I earned more than that in the stock market or I earned more than that wherever, I think what’s really important to recognize with this policy is that I didn’t get this policy originally for me personally for that return. I got it because I could then borrow against that money and earn the same return that someone else is trying to get without having the policy.


So, I’m basically able to take the same money and invest it in two different places. One of them is guaranteed, I have a guaranteed minimum with life insurance. So, whether my investment works out or not, that money is going to grow. But then I can take the same dollars and go do a real estate deal. And so, let’s say that real estate deal, and I talk a ton about this in my book, The Lifestyle Investor, where I give several examples of how I’m earning 6% here on the life insurance side, but then that real estate deal, I might earn 25%, 30% cash on cash return. So, I can just add that other return to it for a much bigger return, whereas someone else, they can only invest that money one time.


Well, my goal is to get the same dollars to work as many times as I can because that’s what the banks do. And how do I take a piece of what they do called fractional reserve lending? They basically take your money, and for every dollar that they get, they lend out that same money 10 times, 11 times, 12 times depending on how aggressive that bank is, but that’s what they do. They take the same dollars, lend them multiple times. So, if I can do that at least once or maybe twice, then that’s a way that I can amplify and exponentially grow my net worth and my cash flow.


Will Duffy: Yeah, absolutely. So, this is usually the first kind of pushback, if you will, when someone’s taking a look at the strategy, trying to figure out if it’s for them is this idea of, wait a minute, I think I can earn a higher return somewhere else. And so, that’s where I remind them that this is an and asset, it’s not an or asset. And I’ll explain what that means. But it’s also another reason why I call it the bank replacement strategy.


Once we’ve changed and moved the conversation to investments, we’ve already missed the purpose of the life insurance policy. It’s called the bank replacement strategy because it’s only going to replace a bank savings account. It is not going to replace any investments that you want to make. And so, that’s key. We should be taking this life insurance policy and saying, okay, would I rather put my money into this policy or would I rather put the money into a bank account? And you compare those. That’s it.


Once you make a decision, whatever decision you make, let’s say you say, okay, I see the benefits of the life insurance policy, I’d rather put my money there than a bank account, great. You then have the access and the ability and the liquidity to utilize that life insurance policy exactly how you utilize a bank account, and now, go invest in whatever you want. This particular strategy, Justin, is not going to prevent anyone from investing in the exact same things that they were already going to invest in. What it’s going to do is it’s going to create a new asset that’s going to build wealth for them, tax-free wealth that they will have in addition to all the other investments that they were going to make. So, you hit the nail on the head. You have the ability to borrow against the life insurance policy, and essentially, go invest in whatever you want.


Justin Donald: And it won’t show up on your credit score. No one knows. If you go get a loan, that shows up everywhere. If you borrow against your own money in a whole life policy, especially crafted whole life policy that is built for you and for kind of where you’re at in life, that doesn’t show up anywhere, and you can pay it back on whatever time frame you want, which has been huge for me because I use these to invest in virtually every real estate deal I’ve ever done and most of the other deals I’ve done in terms of operating companies, I’ve done hard money lending with this. I mean, there’s a ton of things I’ve invested in where this has been my down payment or this has been the amount that I use as my percentage of the acquisition.


Will Duffy: Yeah, definitely. I think this would be a good time to talk about something, which is I’m going to tell everybody right now, the biggest problem with life insurance. If you’ve ever looked at life insurance, you probably figured out this is the biggest problem. If you’ve ever tried to utilize life insurance as a strategy and not just a pure protection play, where if you die, there’s a death benefit and you had a poor experience, it’s probably because of what I’m about to tell you.


And by the way, I’ve looked, I’ve attended conferences, I’ve read books. No one ever talks about this. I’m going to give you the biggest problem with life insurance, and then I’m going to tell you how to solve it. The number one cost with life insurance is lost opportunity cost. That’s it. And lost opportunity cost is created by you funding a life insurance policy and then you having to wait time before you can access the money and do something else. You have lost opportunity cost during that time.


I’ve looked at so many policies over the years that people have brought to me that they either have or somebody is presenting to them to get my second opinion on, I’ve lost track. But I can tell you I’ve seen it all. I’ve seen policies where you don’t have access to your money for 7 to 10 years. I’ve seen other policies where you don’t have access for many years, and once you finally have access, it’s some small percentage of what you’ve put in. That is the problem, is the lost opportunity cost.


And so, I actually would say don’t do life insurance like that because if you miss out on an investment and that investment turned out to have a really high return, you’ve literally just lost the opportunity to partake in that. If we want this strategy to work, if it’s going to be a bank replacement strategy, you’ve got to have access to the money similarly to what you would have in a bank account. And so, how we’ve solved this is we utilize a rider, I call it a one-day rider. This is going to be different than any riders that anybody’s ever had or heard about or utilized or experienced. This is a one-day rider, which means when you use it, it falls off after the first day.


So, this rider is only on the policy for one day. This rider gives us 90% access in the cash value to what you’ve put into it the very next day. That is the key. That’s really the secret sauce to this strategy. So, if somebody funds a life insurance policy, just going to throw out an arbitrary number with $100,000, they have access to $90,000 the next day. They can then either wait until they’re going to invest or take advantage of an investment opportunity that they may have right around the corner.


Justin Donald: And so, this is a great point because when I was about to make an investment and I had talked to someone, and this is before I’d met you, and this individual who ended up becoming a really good friend said, hey, Justin, I get that you’re thinking about making this real estate investment, but why wouldn’t you just run this money through a whole life product and then you can borrow against it at 90%, and then you can put that money into the real estate? Why would you not do that? And I thought about that and I was like, oh, you can do that like that? Like that’s possible to do? That sounds crazy.


And so, that’s what I did because it was a no-brainer. Why would I not just earn a guaranteed return over here with the life insurance and just borrow against it for the down payment on the real estate? Like, that made all the sense in the world, but it never clicked like that before and it turned out to be one of the best decisions I ever made.


And by the way, I did this early on in my life, like I was 25 years old. I wasn’t dating anyone at the time. I knew I wanted to get married at some point. I knew that I wanted to have kids at some point. But I mean, this was way early on, and I had people saying, you have no dependents. Why would you get life insurance? That’s such a horrible idea.


And I just knew that all of the people, all the most successful people around me, the people that I wanted to become, were utilizing this strategy. And then the masses, the majority of people were telling me not to do it and they weren’t using it. And I decided to just copycat the smartest, most successful people I knew because they were doing it. And sure enough, that strategy ended up being a great strategy. I borrowed against it, made that investment, was able to pay back that loan over a period of time. I borrowed it back again, made another investment, bought some more real estate, did that again. And so, virtually, every type of, like when in my book I talk about my first asset class and my first assets purchased in mobile home parks. And these were all down payments produced by dollars borrowed against my whole life policy.


Will Duffy: Yeah, it’s powerful. Let me give one kind of interesting success story that some people might be able to relate to. Quite a few years ago, probably seven years ago, a family office out of Southern California came to me. They had heard about the way that I utilized this strategy and they were very interested in it, but they gave me essentially a problem that if I couldn’t solve it, they weren’t going to do it. And they had a multifamily apartment building that they were offered. It was not on the market, it was off-market, and they needed to pay cash.


And so, they asked me if I could get them the policy, set it up for them, and if they could take the money right back out within two weeks. And we were able to pull it off for them. So, they put $2 million in and we were able to pull back out $1.8 million around seven days later. So/ that was a really good success story.


Justin Donald: That’s incredible. And at that point, there’s no reason not to do it because in these policies, it eventually becomes, like if you fund it properly, it compounds. And at a certain point, the people in the industry will say that it’s self-funding, meaning that it’s producing a dividend that is large enough each year to cover the premium payments. And I remember thinking, oh, I want to do that. But then once I got there, I realized, wait a minute, I actually don’t want to do that because I want to stuff as much money in here as I can because it grows tax-free. So, it wouldn’t make sense for me to use the dividend that’s already in the policy to cover it when I can just pour extra cash into it. And so, that’s an interesting wrinkle that sometimes you don’t think about. Sometimes it’s nice to just be like, oh, I’ve got this policy that’s self-funding. I don’t have to worry about it. It just keeps building and growing. But as you create more wealth, as you earn more income, you want to find places, smart places for that money to go.


Will Duffy: Yeah. You’d be surprised how often people come to us and they say, hey, we want to keep funding it and we actually want to put more in. And so, once people get a hang for it, they understand how it works, they use it, they kind of get their hands dirty, it’s like, okay, there’s always going to be a need to store cash always. And where is the best place to do that? It’s in this life insurance policy. And so, yeah, people come to us.


Now, when you and I met a few years ago, you had obviously already amassed a significant amount of wealth inside of life insurance policies. You had been doing it since your 20s. I think it might be good to have a conversation about you sharing your policies with me and then kind of what I saw.


Justin Donald: Yeah. So, this is interesting, Will, because I definitely felt like I was ahead of the game. Like I had figured some things out. I’d been a student, I’ve been reading books, I’ve been meeting with people, I’ve been educating myself so that I learned and understood and was able to utilize whole life in the way that I had learned about it. And so, there weren’t too many people in my world doing this. And I felt, you would probably say, according to most people you talk to, I was pretty knowledgeable.


But compared to where you were and what you knew, I knew so little. And I remember you running, basically, you took all the numbers, you dug into this, you know my docs at a level that I hadn’t even dug in into them and figured some things out that were not super advantageous based on when I retire, when I hit the age 60, that some of the terms change and they’re not as favorable and the chassis that it was built on based on how many years until this policy was complete, was maybe faulty. It was too many years versus trying to get in. I’m like a smaller, like the lowest number of years for the chassis. So, that way, I don’t have to pay the premium well, well into my later years.


And we talked about direct recognition and non-direct recognition companies and the pros and cons to each situation and how that is holding me back. And basically, you illustrate, you threw everything into a spreadsheet, and you said, hey, if you stay with where you’re at, you’re far ahead of almost everyone else in the world, like you’ve done something most people don’t do. This is incredible. You’re going to be well-off. This is going to compound. Just this single strategy alone is many millions of dollars.


But if we crafted this policy differently using your strategies, Will, you showed me what it could earn and the difference of what it was going to be versus what I could earn utilizing your strategy was somewhere in the tune. This is what was mind-boggling. There was somewhere in the tune of like 9 million more dollars on one policy only and if I never put another cent in the policy. So, if I never made another premium payment, all I did was do what’s called a 1035 exchange, which is like a 1031 exchange. So, for those of you that are familiar with real estate, when you sell a property, there is Internal Revenue Service Code, IRS Code, and the corresponding number is 1031 where you can basically take those gains and you can roll it into a new asset, a like-kind asset, and you basically defer the tax to a later period of time so you don’t pay tax on it today.


And the same thing happens with life insurance, where you can do a 1035 exchange in exchange from one policy or one carrier to another. And so, it was to me a no-brainer, seeing what you uncovered, how much more this would be worth if I put nothing else in it, let alone the fact that I actually wanted to put more money in it. I wanted more money to grow tax-free. So, I knew we are talking tens of millions of dollars difference just by making this one switch.


Will Duffy: Yeah, definitely. And for people listening, that included both cash value and death benefit. And so, Justin, when we met, you definitely knew more about life insurance than anybody we had ever met before. You started earlier, you’d put more money into it than most people we had met. You had already amassed significant cash value.


But then, I love the details. I’m a details guy. I wanted to get under the hood. I wanted to take the engine apart and say, okay, what does Justin actually have here? And the first thing that stood out to me was what you mentioned, which is direct recognition versus non-direct recognition. And this is something that I’m passionate about because it really does affect the numbers.


And so, let me explain to the audience what these terms mean. They’re legal terms. So, they were created probably by a lawyer. And direct recognition means that a life insurance company is going to directly recognize any policyholders in a given year that have borrowed against their cash value. And so, obviously, that’s what you were doing. That’s what I do. That’s what we encourage people to do.


And so, what this means is, is that the insurance company is going to actually give you a different dividend rate and different loan provisions if you borrow against the policy. And what’s interesting is you can probably already guess this, that the reason the insurance company is doing this is because it’s in their best interest. It’s to their benefit, not yours. And so, direct recognition was created by the insurance companies to help them when people are borrowing against their life insurance policy. And so, everything that we do and have done has always been non-direct recognition, which means if you borrow against your policy or not, they’re not going to change the loan provisions, they’re not going to change the dividend. You’re going to get the same return regardless.


And what makes this interesting is that most people, almost all that I meet and I teach them about direct recognition versus non-direct recognition, and these are people that actually already have direct recognition life insurance policies have never heard of it. And so ,the reason they’ve never heard of it is because it doesn’t really come up in the sales process. And believe it or not, there are people that actually work for life insurance companies that are selling these policies that don’t really understand what direct recognition is.


This only happens once you borrow against the policy, and you can’t borrow against the policy before you get it. So, through the sales process, you look at these illustrations, you look at these projections, you look at these numbers, they all look great, but you’ve never borrowed against it. And so, it actually takes someone with a lot of knowledge, like myself or someone who goes back and relooks at the numbers once they start borrowing against the policy and says, wait a minute, these are different to actually discover what direct recognition is. So, in doing an in-depth analysis on you and your family’s policies, yes, because you are an investor, you’re the lifestyle investor, and you’re constantly using your liquidity to invest in other things, and you’re always churning the money in and out of the life insurance policies, this really added up in your situation and it quickly reached millions of dollars difference to switch you to a non-direct recognition policy.


Justin Donald: Yeah, that’s interesting. And by the way, we’re just talking about my policy because my wife has a policy, my daughter has a policy. I think anyone that you have an investable interest in, you should likely get a policy. If you’re in business, you can get policies on your partner’s. If you’re uninsurable, meaning you have bad health or something happens, there’s just something that’s not favorable with anything health-related, you can always get a policy with another family member, a spouse, children, grandchildren, or other extended family as long as there’s an insurable interest, and that’s pretty easy to prove.


Will Duffy: Absolutely. Yeah. As long as your family members are insurable, it makes a lot of sense to get a life insurance policy on your spouse. It actually makes a lot of sense to get life insurance on your children. That’s obviously a conversation for another time because there are some nuances there. But, yes, all of this is essentially going to protect your family. You, your spouse, your kids are all going to have death benefit coverage. Their health rating, everybody’s health rating is going to be locked in for the rest of their life. And you’re going to continue to just build the family bank bigger and bigger and bigger. Your wealth is going to be greater because you have money sitting in a life insurance policy, growing tax-free, getting paid a dividend. If the insurance company declares a dividend each year and it’s just going to be night and day different than just having money sitting in a bank account.


Justin Donald: Yeah. And we obviously don’t have time to go down this rabbit hole of different insurable products and strategies for kids and like how to pay for education. I mean, you did a really cool session for the Lifestyle Investor Mastermind, which was awesome. You’ve done several sessions for us and with us. Those that are part, make sure you check those out.


But for today, I really just want to stay focused on this single strategy. So, the first thing you showed me was this direct recognition, non-direct recognition. And I had no idea. And I’ve done a lot of studying and this made a lot of sense to me. And so, we ended up switching carriers to a company that actually had a stronger performance anyway. And I mean, the bottom line is if you have some sort of dividend paying whole life strategy policy, that’s better than not having one. But if you’re going to do it, why not optimize to the best possible policy with the best possible company and carrier and focus on getting a top-tier rating?


Will Duffy: Yeah, absolutely. We looked at two other things that I want to hit on that I think the listeners will really appreciate. We looked at size of the insurance company and we looked at the investment thesis of the insurance company, how they invest their general portfolio. So, number one, size of insurance company, I love to give credit where credit is due. I had a nine-figure client teach me this and I love it. I’m always in the mode of who can I learn from.


If I can learn from other people’s mistakes and not learn from my own, that would be much better, but you’ve got to learn from your mistakes as well. So, I had a nine-figure client, and he taught me that looking at the size of an insurance company actually matters. And I had never considered that before. And he actually was in the process of doing that.


And the reason why he said this matters was because you need to realize that even though it’s rare, things can happen to life insurance companies. And if you go back and you look throughout history, it’s only happened a small percentage of the time. It’s very, very rare, but it’s not the big insurance companies that it happens to, it’s the small insurance companies.


And so, I went out and looked and said, okay, there seems to be kind of three tiers, if you will, small insurance companies, medium-sized insurance companies, and then you’ve got the large insurance companies. And he encouraged me. And we’ve done this to only work with the large insurance companies because that way, you want to make sure they’re going to be here another 100 years going forward. And so, that was big.


The insurance company that you were working with at the time, Justin, happened to be on kind of the top end of the smaller insurance companies. So, they weren’t like in the smallest of the small, but they still fit into that small category. The second thing we looked at is what’s the insurance company’s investment philosophy. And I think this was a fascinating conversation that you and I had because how the insurance company invests their money is going to have a direct correlation to some extent to that dividend that you’re earning inside of your policy.


And so, what we saw was, was that the company you were with had a more traditional approach of investing in bonds to get that kind of safe return, but we had seen their dividend had been coming down because interest rates were going down and they were having a harder time creating yield. And I pointed out there are other insurance companies that do things differently and invest in businesses, invest in real estate, invest in other things to create yield in a low-interest rate environment. And that to me is just super fascinating. Most people, I think, don’t go to that level of not just looking at who the insurance company is, what they offer, but their size, their strength, their financial stability, and then going so deep as to looking at their general portfolio and figuring out how is it that they’re investing their assets as well.


Justin Donald: Yeah, great point, Will. And something else that I want to point out that a lot of people may be unaware of. So, when you have an insurance company, I think today, we all are kind of sold on this idea that keep your money in the banks, banks are good, banks have your best interest in mind. They don’t. Banks have their best interest in mind.


And you can listen to earlier podcast episodes that I’ve done with James Hickman and with Andrew Henderson and you’ll hear just some differences where our legal system is based on you’re innocent until proven guilty. In the banking system now, you’re guilty until you can prove innocence. And they get to call all the shots.


And then on top of it, banks are lending money out and investing other dollars in a very risky format. A lot of these banks are investing in high-risk derivatives. I mean, part of what’s led to a lot of these financial collapses over the years is the aggressive investment nature of the banks. And so, a lot of people don’t realize that most of the banks in the US, for sure, all the big name banks, most of the medium-sized banks, their solvency ratio is really low, like scary low, like disgustingly low. So, one bad move and a bank could collapse just like what we saw in 2008.


What’s different with life insurance companies is they actually have to have in cash on hand, the death benefit total of everyone that has a policy with them. So, if everyone died at the same time, they could pay it out. So, from a financial strength, from a solvency standpoint, you don’t see a whole lot of insurance companies going under, especially well-established ones with good practices because they are in cash. They’ve got to have 100% of those payouts in cash. And so, this is, again, another reason for that bigger company versus a smaller one that maybe is trying to get things going, and maybe they don’t have the amount in cash that they should have at a given time.


Will Duffy: Yeah, the insurance industry as a whole is one of the last remaining industries that the federal government still allows to use the word guaranteed on their marketing material. I mean, using the word guaranteed in anything money-related, everybody knows is a big no-no. But the insurance companies have proven that they can withstand these situations. They can payout death claims, they can keep enough money in reserves. And so, that is a testimony to what they’ve done.


And it does lean back on what we’re saying, which is having a place for you to put money like a bank account that is secure, liquid, safe, etc., is super, super important. And again, we wouldn’t have time to talk about this today, but there are people that I think make very, very good, convincing arguments that your money might actually be safer with an insurance company than it is with a bank. I only have one story here in my career. I’ve only ever met one person who had to collect on FDIC insurance. And it had been years, and they had collected some, but not all. So, take that for what it’s worth.


Justin Donald: Yeah. I mean, it’s a nice thing to have the concept of FDIC. So, basically and generally, it’s up to $250,000, right? So, like, let’s say you have a bank account that has $250,000 and the bank goes under. The government’s supposed to cover that. I don’t know that they’re always covering that, as this example shows, but a lot of people keep more than that with a bank, maybe in different accounts thinking each account has that, and that’s not the case. I let people know all the time.


At the moment you exceed the FDIC-insured amount, you got to move it to another bank because that is not covered. If that bank goes under, if something happens, and by the way, people are like, well, if that bank goes under, that’s rare. No, it’s not. There was a bank run within the last, what, eight months in Canada. There’s one recently here in China. I mean, this is not a weird thing. This happens all the time.


Will Duffy: Yeah. You really got to be careful. You really have to know exactly what you’re doing. And again, insurance is only as good as whoever is providing the insurance. And so, I do like to remind people that the FDIC is the federal government. They have not been the best with money and just keep that in mind.


Justin Donald: So, one thing I do want to talk about is what happens with my old policy when I turned 60. I think it was 60 years, maybe it was 65, where the terms changed. It became like so much worse immediately. And I’d love to have you weigh in on this because you dug through all the docs and studied all this. And then when you did your calculations to show me what it looks like in a spreadsheet, it was able to reflect that difference versus when I got the enforced illustrations from the insurance companies. They never show that.


Will Duffy: Yeah. This was one that I did not know going into it. So, in a way, you actually help me become more knowledgeable in this space. When I was reviewing your policies and I was looking at the numbers, they weren’t adding up. And so, something changed at the age of 65 on your policies when you’re 65. And so, fortunately, we were able to dig into this, and through you, ask for more information. And yes, to my shock, the terms of your policy changed at the age of 65. I couldn’t believe it.


And of course, again, as to be expected, they did not change in your benefit, they changed in the insurance company’s benefit. And so, what we discovered was that when you started to take money out of your policy, which is kind of the end game here, is passive income, cash flow, tax-free passive income, of course, out of these life insurance policies later on in life, for example, at 65, it reduced your dividend. So, this is what I would call another form of direct recognition.


And so, that was super, super significant. I’m really glad we caught that when you were still in your 30s and were able to fix that. And so, yes, that’s not something we would ever recommend in any policies that we help people set up and design, are not going to have these surprises down the road, if you will, where the terms of the policy completely change.


Justin Donald: Yeah, that was really disappointing. And something else that I think is important to note, I’ve had people over the years say, why have life insurance? Is it really worth it? And I remember hearing this a long time ago that if you don’t have life insurance and you don’t have adequate money for your family if something should happen to you, if you die without life insurance proceeds for your family, it’s the same thing financially. It’s just leaving your family in the middle of the night, not telling them anything with the primary income, if you’re the primary income earner, stopping. And so, that was really for me like a checkup from the neck up where I said, wow, I don’t ever want that to happen. I hope that my health holds up. But who knows? I mean, we don’t know.


And so, I just remember thinking, all right, at a minimum, I need to have a life insurance policy in place so that my family is covered no matter what happens to me. And they don’t get the equivalent of me running out on them in the middle of the night. So, I just wanted to share that because for anyone that’s like, should I get it? I mean, you don’t have to get the type of policy or as big of a policy as I do, but if you have a family or if you plan to have a family, I think it’s really important to have this in place.


Not to mention that it’s advantageous to have this anyway, like the thing about life insurance that I like the most, so yeah, it’s nice that there’s a death benefit, but what most people don’t realize is that the living benefits of these policies are tremendous. There’s so much that happens, so much that we can utilize today while we’re alive that really helps us compound wealth, really gives us liquidity and flexibility. And then, I just love having a loan that I can pay back however I want, I can pause it whenever I want to, I can make an extra payment if I want to. I could not pay it back at all if I wanted to and if times were tough because at whatever point in time I pass away, the life insurance company is just going to take whatever I owe in a loan off of the death proceeds.


Will Duffy: Yeah, that’s right. I mean, obviously, nobody’s really going to want something where the only benefit is created by their death, right? Nobody is going to want that. And so, yes, if this is done right, there’s a lot of living benefits there, but the death benefit is also there as well. And you can’t really underestimate that.


I’ll explain to you kind of where I’ve come to just in my own life with my wife and my kids is that, number one, I can’t imagine losing a spouse, especially the breadwinner, and dealing with that with minor children. And so, that is going to create something that I can’t even wrap my mind around in terms of just stress and anxiety and grief and worry. And so, I want to make it so that the last thing that my wife has to worry about is money. She’s going to have everything else on her plate. And so, having life insurance ensures that that won’t have to be added to her list.


Justin Donald: Yeah. And it’s powerful. And I joke around with my wife all the time, and I let her know. I just, in a very comical way, remind her that she’s better off financially with me dead than alive. And she’s always like, stop it, stop it. But I mean, the truth is, she’s taken care of, and I know there’s a peace of mind that she has around all that because she doesn’t want to do the business stuff that I do. She doesn’t want to run the real estate that we have. She doesn’t want to have any involvement in these operating companies that I have involvement in. So, she’s got peace of mind, and I think that’s powerful.


Something else, though, that I think is important. When I was studying the fees or the costs of having life insurance, what does it cost? An agent’s always going to make money. The insurance company’s always going to make money. So, no matter how you look at it, someone’s going to earn whatever their rate is. But one thing that I look at is, is this a policy where someone makes so much, like is this like the highest fee or highest commissioned product? Or is this reasonably feed or commissioned?


And so, one of the things that I like about this and I like about your strategy is not only is this not the highest commissioned product, this is the exact opposite. The way that you’ve structured it, it’s actually the lowest commission whole life product. So, not only is it the best, it’s the lowest fee for– so I know a lot of people in life insurance, I know a lot of people in this space, I know a lot of people in financial services. And the temptation is, hey, let’s issue the product. It may not be best for the person I’m issuing it to, but it gives me the biggest commission check. And so, there’s this misalignment in really financial services and insurance and just, I mean, anything where, unfortunately, there isn’t great control on being a fiduciary or having a fiduciary responsibility to doing what’s best for your client. And so, you have a lot of people that prescribe what’s going to make them the most money. I can’t stand that. That is true misalignment and virtually, like across the board, financial services and insurance and all kinds of stuff.


What I love about the way that you do it is you are on the low end, and for clarity’s sake, you’re on the lowest end, like there is not a product that you would make less today. And I like that that is the strategy. And by the way, you’re rewarded because over time, you can do very well with this. But this is not like a make a big commission real quick because what if someone cancels the policy or something later? Like you’re doing this for the benefit of those involved because I know you could have a higher commissioned product.


Will Duffy: Yeah, every single insurance company has a commission grid. So, it’s not simple. It’s not like real estate, where it’s 2.8% for each agent. No, every insurance company has a grid and the grid is all the different payouts, all the different levels, all the different products. I mean, it’s an entire sheet of paper. It could be a hundred different payouts.


And so, yes, to what you’re saying, not only is this the lowest commissioned product with the insurance company on their grid, it’s the lowest commissioned product in the entire country that we’ve ever seen for any product. And so, again, that wasn’t by design, but I think it makes sense, at least it does to me logically. The lowest commissioned product is going to essentially benefit the end user, the policyholder the most, and the insurance company the least, which I think is why that low number is there. But yeah, that does factor in, and I’m glad you brought that up because that’s important for people to know going into this.


Justin Donald: I love it. Well, there’s so much to like about this. Obviously, I’ve been doing this since I was 25 years old, and I think the world of it. And obviously, at this point in time, I have a lot of years of compounding tax-free, mind you, that has really benefited my family, and obviously, myself and gives us the ability to really have our own bank. And I think that’s important.


And by the way, there are all kinds of specialty lending institutions that will create unique products where you can borrow against it at even lower rates than the insurance companies. I mean, there’s all kinds of cool stuff because this space is so big and it’s so popular, but I just wanted to give you a chance before we wrap things up to share if there’s anything else that you think is important for people to know. Obviously, before we’re done, we’ll have you share where people can find you, but anything else that is of note that we want to make sure our audience learns and knows and understands?


Will Duffy: Yeah, for sure. I would just say this. It’s worth taking a look at. It doesn’t cost anything to take a look at the strategy. We’ll show you numbers, we’ll show you illustrations, we’ll show you the ins and outs of how it works. One thing I would remind people of is that nobody’s promised tomorrow. We have so many stories, tragically, unfortunately, where people just delayed or waited or didn’t think they needed life insurance, and then something happens to their health.


When something happens to your health, you can’t erase the past. When you go through the underwriting process for a life insurance policy, they’re going to know, they’re going to look up at what’s happened, what you’ve been diagnosed with, etc., and that’s going to affect your insurability, the ability for you to get a strategy like this or the ability for you to get a good rating on a policy. And so, I just would say, don’t delay. Go ahead and take a look at it. If it’s for you, great. If not, that’s fine, too. But this is one of those things where if it’s done right, it will benefit you. We haven’t had anybody regret doing this. People are very happy once they have it in place and utilize it. You’re a testimony to that as well. And I think it’d be good for people that take a look at adding this to what they’re currently doing.


Justin Donald: Yeah, I think that’s great. And for me, I feel so good about sharing you, your story, your strategy, because I use it myself. And one of the things that I like doing in The Lifestyle Investor Mastermind is I’m assembling the smartest people, the sharpest people, the most premier experts in their industry, in their craft. And I want to be able to have these individuals for our members to have access to. So, whatever their needs are, whatever specialty, legal, niche issue they have, they have an attorney that can meet that. Whatever high-level tax strategy they need, they have someone that can meet that. Whatever insurance need someone has, we’ve got an expert like you that can meet that.


And so, I love having you on the show. I love being able to share some of the cool strategies that I’ve used, strategies that I shared in my book, The Lifestyle Investor strategies that have benefited me in acquiring a lot of real estate and a lot of other assets through policy loans. And so, I’m just excited for us to finally be able to connect on this. And I want to give you a chance to share where our listeners and those who are watching can contact you in case they want to learn more.


Will Duffy: Sure. Best place would be our website, which is DuffyMethod.com. That’s just my last name, Duffy, D-U-F-F-Y, Method, M-E-T-H-O-D dot-com. Email is will@duffymethod.com. And there are some phone numbers on the website as well.


Justin Donald: Awesome. Will, I really appreciate your time and digging into this. And years ago for you outlining and spending the time and saying, hey, Justin, this maybe isn’t exactly what you thought it was going to be. Or maybe I can just do something better than what you ever thought it could be. And so, I appreciate you taking the time to do that.


And I just want to wrap up today’s episode the way I do each week, which is this. What is one step you can take today to move towards financial freedom and living the life that you truly desire on your terms, not a life by default, but a life by design? I’ll catch you next week.

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