Jim Harbaugh, head football coach at the University of Michigan, is one of the highest-paid college football coach thanks to an innovative compensation package negotiated with the university.
The deal includes a creative deferred compensation alternative involving cash-value life insurance. According to Sports Illustrated and other news outlets, this makes Harbaugh one of the most successful coaches — not just on the collegiate level, but also professionally.
Most people are unaware that the compensation strategy designed to provide Harbaugh with millions of dollars in tax-free cash during retirement can also be effective on a much smaller scale. By taking advantage of this loophole, individuals can save thousands of dollars each year in taxes and build up a sizable sum for retirement.
Jim Harbaugh Life Insurance Agreement Details
At the time Jim Harbaugh was hired as head coach at Michigan, both parties agreed to meet and discuss the implementation of a deferred compensation package at the end of Harbaugh’s first season. However, what they ultimately agreed to ended up being much more valuable to Coach Harbaugh.
In lieu of a typical Deferred Compensation Agreement, the Coach and the University entered into a Split-Dollar Loan Agreement under which the University of Michigan agreed to make seven loan advances, each worth $2 million, that would be used by Harbaugh to pay premiums on a life insurance policy.
According to reports, Jim Harbaugh’s $14 million loan from the University of Michigan will not have to be repaid until he dies. At that time, Michigan will recoup its original investment, and Harbaugh’s beneficiaries will receive the remaining amount of the death benefit – whichever is greater.
However, a closer look at the actual terms of the “Loan Agreement” reveals that Harbaugh’s beneficiaries are only guaranteed to receive at least $1.12 million following his attaining the age of 70. This means that depending on when Harbaugh dies (and how long he lives), his family could potentially receive more than double what is required by policy and he will remain one of the highest-paid college football coaches.
As Jim Harbaugh’s tax-free retirement pot of millions shows, the use of traditional life and disability policies is not just for high-profile football coaches. In fact, college presidents, non-profit executives, and even corporate executives have all benefitted from these types of solutions in one way or another.
So when considering how to retain valued employees, keep in mind that there are times when it makes sense to use the organization’s balance sheet instead of the income statement.
The Benefits of Using Split-Dollar Life Insurance in the Compensation Package
Life insurance is a vital part of financial planning, but it can be expensive and difficult to obtain. A split-dollar life insurance arrangement is one way to get protection without breaking the bank. In this type of program, an employer agrees to loan money to an employee (usually over seven years) that is invested in a cash accumulation life insurance policy such as a participating whole life policy.
The goal of a traditional life insurance policy is to pay the lowest premium for the highest amount of death benefit. However, the policies used in these programs do the opposite and pay the highest premium for the lowest amount of death benefit.
This unusual approach reduces policy charges which in turn will allow the policy’s cash value account to accumulate funds rapidly.
Additionally, the loan from the employer to the employee will be paid from the policy cash value during the employee’s lifetime, or it will be paid out of the death benefit if the employee dies.
Other Prominent People Have Taken Advantage of Cash Value Life Insurance
Insurance has become a standard part of many coaches’ compensation packages, and it all started with Harbaugh.
Clemson, for example, has included insurance in Dabo Swinney’s contract. Other notable people who have insurance include:
- President Biden has four separate insurance policies with a mutual company.
- Walt Disney used his cash value to fund Disneyland.
- Stanford was able to keep its doors open during the Panic of 1893 thanks to cash-value life insurance.
- JC Penney funded its entire payroll using life insurance when the stock market crashed in 1929.
What about the “What If?”
As you’ll likely assume, not all contracts hold water and most have holes in them.
For example:
If Coach Harbaugh decides to leave the school or is terminated, the university will discontinue the loans for the premium payments. Therefore, should the insurance policy be canceled for any reason after this point, Harbaugh would then be required to pay back the money that was loaned to him by the University of Michigan.
As part of the amendment to Coach Harbaugh’s contract, his salary will be renegotiated after his fifth season in order to make sure he is still receiving market-level compensation. The original deal, which has already expired, contains a clause that allows for these renegotiation talks to take place.
FAQs
What is split-dollar life insurance?
Split-dollar life insurance is an arrangement where an employer and employee share the costs and benefits of a life insurance policy, often used to provide tax-advantaged compensation.
How does Jim Harbaugh benefit from his life insurance policy?
Jim Harbaugh’s policy allows him to accumulate cash value that can be accessed tax-free during retirement, while his beneficiaries receive a death benefit.
Can regular individuals use split-dollar life insurance?
Yes, while typically used by high-profile individuals, split-dollar life insurance can be adapted for smaller-scale use to provide financial benefits.
What happens if the policyholder leaves their job in a split-dollar arrangement?
If a policyholder leaves their job, the employer may discontinue premium payments, and the policyholder might be required to repay any loans advanced by the employer.
