Creative Strategies for Building Wealth

Roschelle McCoy from Titanium Investments interviews Adam Doran from Prevail Strategies as they talk about a lesser known strategy and very creative strategy for building generational wealth. Read the full interview transcript below or watch the recording here.

R: Hi everyone, Roschelle here from Titanium Investments. I've got Adam Doran on the line with me today and we are going to talk about a very interesting topic, that is, I would say a little lesser well-known, in the financial industry. I will let Adam do it justice, but first, I will introduce myself quickly. As I mentioned, I'm with Titanium Investments. We are a multi-family investment firm that helps passive investors find good opportunities for generating passive income and to help them grow their wealth. Adam Doran is here with Prevail Innovative Wealth Strategies, and he will be talking to us today about a little-known type of insurance policy that you can use in a concept called infinite banking. So, welcome Adam.

A: Hey, thank you Roschelle. Thanks for the opportunity to share with you and folks in your network about a creative capital strategy for real estate. It’s something that I've been doing with my own money for about the last ten years now, and I've leveraged in my own real estate investing and it's pretty powerful when you learn about it.

R: Awesome, why don’t you tell us a little bit about your background and what you do for your company?

A: Sure, I actually spent 16 years as a police officer - most of those years in the Kansas City area. That was the first career I had. I transitioned to financial services in 2018 as a result of my own personal financial journey to pursue a path of wanting to build wealth for myself and my family. So, when I made that transition, my first couple of experiences were working at traditional firms and it was not at all what I wanted to be doing. Then I found Prevail, which by design is an industry disruptor. So, at Prevail we believe the financial services industry is broken. We believe it takes control away from clients and we want to show people how to get that control back by educating them on strategies of how real wealth works, how you can insulate yourself from things like creditors and increasing tax rates, how you can have more control and more liquidity, and be able to use your money for opportunities that come up, specifically opportunities for real estate investing. That's one of my personal favorites and that's the topic that we're going to speak to you about today.

R: Thank you, Adam. Let me ask you a couple of questions about this type of investment opportunity. We’ve all heard that there's many, many different ways for people to invest in real estate through different types of retirement accounts. Obviously, you can have cash in the bank, but this method is definitely not as commonly known. So, tell us a little bit more about this type of investment vehicle.

A: Sure, well, I would also say that I think different strategies have a different place in someone's individual plan, and so I hope that as someone is listening to what I'm going to share today, that they don't necessarily take it as prescriptive, but as a creative idea. Something to think about and ask yourself, “Does this fit into my overall strategy? What am I already doing?” Because, at least on a personal level, I have a self-directed retirement account that I use and leverage in real estate, so I'm a fan of those. I also have a specially structured insurance policy, which we're going to talk about, that I also leverage into my real estate investing so I don't look at it as an either or, I look at it as one creative strategy that may or may not be appealing to you.

I think the fundamental belief behind why this might be valuable to somebody really comes down to primarily, taxes and liquidity. First let’s talk about taxes, because when you consider as an investor or as somebody who's putting money in different places, the default system that we have here in America is going to concentrate you in either a taxable account or a tax deferred account. That's what the banks offer you, that's what your employers offer you. You're putting money into an account and growing it where you're either getting a 1099 every year and you're paying taxes right now as that money grows, or you're deferring the taxes and using it as a tax break today. But then at some point in the future when you take income out of that account, like a 401K, you're going to have to pay taxes. What I find with most of the folks I work for is, 80% or more of everything they've built up and accumulated is in one of those two accounts. So, if tax rates were to go up by even just 10%, what would that do to your future income if you haven't paid taxes on that money yet?

So, that's one of the key questions that we like to ask, and one of our core beliefs is tax rates are likely to go up - very likely to go up - as a matter of fact. In the news, it seems like there's something new every day, where somebody is talking about how we need to raise taxes and I don't think that's going away. Historically speaking, tax rates were much higher in the past. As a matter of fact, in 1944 and in 1945, the highest income tax rate was 94%. Compare that to today's prize income tax rate of around 37%. Tax rates are historically low, and we believe that they're likely to go up, so having the ability to put money into some place where it can be tax-free and insulated from tax rate hikes is really valuable.

The second thing is liquidity. When you consider 401K, IRA, 457, 403 B - all the different plans that employers provide for us to save for retirement, those vehicles become a place where it's easy to accumulate money, but to distribute that money to yourself, or to get control over and have liquidity for an opportunity that happens right now, is a little trickier. Most of those accounts come with requirements where if you're going to access that money before 59 and a half, you would be penalized to do so. So, having the ability to put money in not only a tax-free place, but a place where you can access that money and go use it to do a real estate deal or to start a real estate business. That's the main value proposition behind why you would even look at this, because when you think about vehicles that are tax-free, you can put your money in and have liquidity without those pre-59 and a half requirements. When you look at most retirement accounts, they have certain caps, right? You can't put more than $6,000 year into your Roth, unless you're over 50 and then it's $7000, right? Or if you have a 401K, you maybe can elect Roth contributions, you maybe can't - depending on what your employer offers you, and then at that, you're going to be capped at $19,500 every year. Furthermore, to do Roth contributions, you can actually make too much money if you and your spouse are doing really well for yourself, so you may not have that option, and would need another option. So again, kind of playing into why is life insurance even entered the conversation?

So, thinking of those things; the need for a tax-free place to put money, the need for liquidity, and control. When we narrow down the options, it really comes down to Roth accounts and life insurance, because it gets a very unique treatment under the tax code. That’s why we look at this, and that's what is valuable about it. I can speak more to some of the details, and I think you've got some follow up questions probably for me on how does this work, and how does it look, so we can certainly get to that.

R: Yeah, absolutely. You brought up so many good points there that people don't always think through. Just because you've got that money in your retirement account doesn't mean you're going to keep it all or get it all back when it's retirement time. I think that's one of the big pitfalls of a lot of our financial retirement products today; you don't always realize that just because it's there in your account, it doesn't mean it's actually all yours to keep. The government, depending on the type of account, is likely going to take a cut of that. Unless you're in one of those tax-free accounts. The other point you brought up that I think is really key here is that you said life insurance is treated differently in the tax code, and the way this is taxed or not taxed, is entirely different than some of those other accounts. Now I know you don't have a crystal ball, you don't work for the IRS or help make the tax code, but is there any history as to why it's treated differently, and do you foresee any changes coming in the future?

A: Really good question. So, every once in a while, some level of change gets made. I can tell you this strategy of warehousing capital in a life insurance policy has been a strategy for wealthy families for years. This is something the Rockefeller family did. Walt Disney had a substantial life insurance policy that he used to help fund the startup with Disneyland. There are some prominent figures today that use this strategy. Our current President, Joe Biden, on his 2011 financial disclosure, disclosed he had six whole life insurance policies. He listed them under the assets and income column and said he was getting tax-free retirement income from those. So, our own President uses this strategy. It's been around for a long time.

There have been some regulatory changes. It used to be that you could put a considerable amount of money into these and have a little death benefit. People were doing what was called a single premium life policy - where you literally, if you had a half million-dollar chunk of money, or whatever it would be, you could make one single premium payment, it then became a paid-up policy, and now that money is tax free. That went away in 1987 when the IRS instituted a rule called the MEC - the modified endowment contract - and very briefly, what that means is they'll still let you use this as a tax-free vehicle, but for the dollar amount that you decide you're going to put in, you're going to have to buy a certain amount of corresponding death benefit to go with that, and you're going to have to phase that money in over at least a certain period of time, so there's no more of these single premiums. That was the first prominent change that happened to life insurance in quite a long time.

There actually was a recent change this year up to section 7702 of the Internal Revenue Code. Basically, life insurers have been guaranteeing a certain minimum percentage of accumulation within their policies for years, and because we've been in a prevailing interest, low interest rate environment for 20-30 plus years, insurers had to figure out how to restructure the product so that they can remain profitable, and they're in the process of solving that right now. So, there's been some changes in the law where it’s relieving insurers of some of those super high guarantees and allowing them more room in their investment portfolio to do things that will create more return, to offset some of that.

They’ve been guaranteeing people high rates of return, but they themselves have been collecting low rates because their investment portfolios are high grade corporate bonds (interest rates have been low so.) Every once in a while, you'll see changes happen. You're correct that my crystal ball isn't better than the next person, but what I will tell you is, here at Prevail, we work with mutual whole life insurers that have been running successful mutual companies for 150+ years. They have been paying dividends consistently, for 100+ years and have a strong, strong financial balance sheet track record and multiple streams of revenue - in other words - it's a stable, predictable asset.

One thing I do want to point out is, I would not look at this as an investment because single digit rates of return don't make investments appealing. What I would look at this as a cash alternative or a place to warehouse cash. While you're waiting for your next real estate deal, while you're waiting for your next investment opportunity, your next business venture, etc., and the reason being because savings accounts don't make you anything and are entirely taxable. Any money that you would make, any gains through interest would be taxable, and if a creditor would happen to face a creditor’s judgment, one of the first things they will seize is liquid accounts on your balance sheet, like the savings account. So as a cash alternative, it can be kind of appealing as a place to warehouse some money. There are a couple reasons for that, the first being that once we get the money in there, we can distribute it to ourselves down the line tax-free. Two, I mentioned that mutual insurers pay dividends, and they also contractually guarantee you minimum accumulation of cash within that account. In other words, there's no downside risk. So, you can deposit a dollar knowing that that dollar is going to come back to you several times over, whether it's through the death benefit or whether it's through the cash value serving as retirement income - it's a contractually guaranteed asset. I’m unaware of any other cash account where you can do that. Where you can deposit a dollar and then you're going to get three back. Just from the standpoint of having a stable, safe, reliable place to put some money and have access to that money before age 59 and a half so you can make real estate deals, makes it pretty appealing.

R: That's phenomenal. I mean there's so many different pros to this strategy that a lot of accounts don't offer. That kind of makes you see why this is such a powerful tool to use. So, who are these types of policies really designed for? You mentioned the President uses them, and the Rockefellers and Walt Disney – Is it something that's primarily for business owners, or professional investors, or who's really the key target audience for these type of things?

A: I think it comes down to your philosophy and your concerns around money. In other words, if you don't see tax rates going up in the future, then a lot of the value proposition of this might go away if family legacy is not a significant part of your plan. That, this may not be as appealing to you as somebody who really is concerned about family legacy. I guess that's something I didn't touch on a moment ago, that I maybe should have. Life insurance is one of the few assets that as long as there's a named beneficiary will

bypass probate. It's a totally private asset, and it transfers directly to the beneficiary tax free. There are very, very few things that do that. Most assets by default, are going to go through probate unless you’ve properly set up and structured a trust. Life insurance isn't one of those, so from a legacy standpoint it can be really valuable. Real estate investors tend to find a lot of value in this, business owners tend to find a lot of value in this, anybody who has accumulated a significant amount in taxable or tax deferred accounts and realizes how that over concentrates them. If taxes increase, anyone in that position can get value from this because we can reallocate now into a tax-free asset that's liquid, so those are the kind of people that benefit from it.

I would say philosophically, a lot of people don't necessarily like life insurance. What I like to tell those folks, and by the way, I was one of those people, I say, “you know, you don't have to like life insurance that much, you just need to like it a little more than you like paying the IRS out of your retirement accounts.” So, that's all you have to like, it’s just that little bit.

The other thing I want to say too is, I don’t look at this conversation as a product conversation about life insurance, as much as I look at this as a strategy conversation about how can we create tax free wealth, and how can we make dollars go further and last longer long term. Because in reality, if you have a given amount of money that you're saving and putting away each year, whether that's in a 401K, an IRA, life insurance, real estate investments, a Robin Hood account, etc., no matter where you're putting it, if you have a certain amount of money that you're putting away every year. That money, eventually long term, is going to have a net effect for you, for your family, and for your legacy. So, if we can agree on that, the question becomes, where can I put those dollars to get the most net effect out of it. If I could put those dollars in a savings account versus this vehicle and I can get three times, four times the net effect, well, that's a no brainer. It's the same dollars. It's just a matter of the strategy that I'm applying and the place that I'm putting those dollars. So, I think it's a strategy conversation.

R: I love that, and that's certainly conversations not enough people have. I think a lot of people in general just don't fund their retirement accounts enough, let alone have strategic decisions about where they want to be in, 10, 20, 30, 40, 50 years. These are conversations you never really want to have, but they’re critical. Especially, as you said, for those that are wanting to build generational wealth. You have to have a strategic plan in place and be able to know how you’re going to execute on that, so it’s really powerful. There are a lot of financial advisors that sell these types of policies or financial products. What ways can people ensure that they're choosing the right type of plan for their investing goals?

A: Yeah, I will do my best to answer that comprehensively and not take up like the next hour because that’s a fun soapbox for me. So, I guess maybe I will give some cautionary thoughts or some thoughts of here’s what to look for and here’s a red flag. Yes, anybody who's a financial advisor or wealth adviser in that space more than likely offers some level of life insurance products and more than likely some level of market investment products. Same for me, I'm able to offer those types of products to our clients as well.

I would say that in order to build a whole life policy as a true tax-free asset and have that build cash and be able to use that for some people is called infinite banking. But for capital deployment purposes, you want to use the money that's in there today, there are just a handful of mutual life insurance companies that have that, hundred 150+ year track record that I had talked about. These companies paid those dividends for that long and offer features within their policies that when you're using the money, you're still earning the dividend, and still earning the minimum guaranteed interest. So that's different than a lot of stock held life insurance companies who wouldn't offer that kind of product. If it’s a publicly traded company, they’re not going to have that kind of product, it’s going to have to be a privately held mutual life insurance company – and you want to make sure it’s one that has a long-standing track record and a strong balance sheet so those are the only companies we work with.

The other thing is an advisor that actually knows how to build this. A lot of advisors will offer life insurance because it’s a part of the financial planning conversation, but the conversation about life insurance that focuses on a death benefit need versus the conservation that we’re talking about where we’re trying to create a tax-free asset, those are two different things – and one is a scenario where you’re trying to pay the least amount in premium to get the most amount of death benefit because it is a protection mechanism, but the other conversation we are talking about is actually buying as little death benefit as we can to minimize the cost of insurance and putting as much cash in as we can try to create a tax-free cash account. It’s a totally flipped paradigm, total switch of the conversation, so it's important to know that you're working with somebody, that that's the conversation you're having, not the conversation of, “Oh yeah, you want whole life insurance? Yeah, absolutely. Let's take a look at how much benefit you need.”  

Then the other thing too is, I would say that it needs to be an advisor that can, well let me put it this way, one of the things we do in our client process is, we actually will aggregate all of our data (your personal balance sheet, your income statement, that kind of thing) and get it visually put up on the screen for you, using our software and say, okay, here’s a snapshot of present picture, now, let’s flight simulator some different market variables and some different decisions that you might make so as it sits, if tax rates go up by this much percentage, here’s what it does to your picture. Okay, now if we insert this life insurance strategy as a tax-free asset as we create tax-free income in retirement, here’s how that responds to the tax hike we just talked about. So using our software, we can literally, flight simulate different decisions before you have to commit to those - you can actually see the net effect and the net results and it goes back to what I was sating earlier of, we are all going to have certain amounts of dollars that flow through our hands and come into our possession during our lifetime, so it’s a matter of stewarding those dollars and figuring out how to allocate them to get the greatest net effect. And that’s really what our process is designed to help clients do. I would just tell you that’s the kind of conversation you want to be having and those are the kind of questions that the professional you’re working with should be asking so that you’re able to find the blind spots and then also evaluate before you commit to any given strategy – life insurance or otherwise. Ask, what’s that going to do for my picture long term?

R: So many good tips and sound advice all wrapped up in that. Is there anything else that we haven’t covered that you think would be good for the audience to know today?  

A: I'd like to share a little bit about myself because I've been investing in real estate now since 2011, and it was as I was learning about real estate investment that I learned about this strategy. It was presented to me as infinite banking. By the way, if you’ve heard that term, it’s a marketing term that was patented by a guy named Nelson Nash. He wrote a really good book called Becoming Your Own Banker – I would definitely recommend anyone check out that book if you want to really get educated on this strategy. But that’s simply a term, it’s a marketing term, there is no magic, I mean in life insurance land, there is no company that says we do infinite banking policies, it’s merely a way to market the strategy we’re talking about. There are other names that it’s given but here’s what I can tell you is, I do not have a savings account that is accumulating money at no market correlation, no market risk. I’m in year 10 of that first policy I did and this year for every dollar I’m depositing, my account is being credited $1.41. It’s a long-term asset, it didn’t look like that in the first couple of years, but it looks that way now and it’s phenomenal for me as a real estate investor to know that I can dip in that bucket and I can take those dollars and go put them in a deal and I’m still going to earn that interest and those dividends on the money and my policy while it’s also earning me a return in my real estate. So, I’m literally getting a return in two places at the same time, and when the real estate deal pays me back through cash flow or refinance or sale, I can take and then redeposit that money back into my policy which is my tax-free capital account and now I’m ready to do the next one. I am so glad in 2011 when I started learning about and getting involved in real estate investing, that I also learned this strategy and was able to couple the two, because it’s powerful to be getting twice the bang for the same buck. It’s been a game changer for me, this is something I do with my own money, and I think that in itself is really valuable if you’re wanting to research this for yourself. I love to have these conversations with folks, just to look at something creative that’s maybe not as much common knowledge but could be a real game-changing strategy as you seek to build your real estate portfolio.

Also, a little bit on my journey and then, and then I’ll wrap up sharing, but I got started probably the way a lot of folks did – went to a seminar, got into wholesaling, did single family rentals using the BRRRR strategy for several years, then transitioned to multifamily just in 2018. It’s been a fun ride, I love real estate, we’ll probably always own a significant amount of real estate, and now that I’m on the multifamily side, I want to do more of that. So, for anybody that’s watching or listening to this, know that if multifamily is something you’re either involved in or exploring, I can tell you it is a phenomenal, phenomenal asset class. It’s fun to be in, and I’m very thankful for real estate in my world so I hope it impacts your world in a great way as well.

R: Thank you for that Adam. I love the personal touch you put on the end of this where you’re telling your personal experience because I think it speaks volumes that you, yourself have used this type of financial product and you’ve used it for a decade now and have seen good success with that and great returns on your investment. So how can our listeners learn more about you and the company you work for?

A: Prevail’s website is www.Prevailiws.com, and then for getting a hold of me individually, there’s an about section on the website, you can look up the individual advisors. I’m on there and my email is also on there. Otherwise, LinkedIn is the best place to find me. I’m on LinkedIn on a daily basis. My name is Adam Doran and there’s not a lot of us on there and I’m the only one in Kansas City that comes up on LinkedIn so that’s a great place to for first contact. I love the voice messaging feature on there too, so I have conversations with new people every day on LinkedIn – love to use it. I think it’s a great tool for connecting with new folks.

R: I learned something new today. I didn’t know LinkedIn had a voice messaging feature, so yea, I’m going to go check that out. Awesome. Well, thank you so much Adam for your time today, I truly, truly appreciate it, and let’s hope our listeners reach out and get some more information from you on this incredible product that you have.

A: Thanks, Roschelle.