Split dollar life insurance this is a term you need to know if you want to leverage your relationship with your employer or your key employees…
It’s a valuable tool!
In 2016, ESPN reported that the University of Michigan was spending millions of dollars a year on a life insurance policy for football coach Jim Harbaugh.
WHOA. Now that’s some serious cash.
So what exactly is split dollar life insurance?
I’m gonna explain right now – so grab a cuppa joe and dig in.
What is Split Dollar Life Insurance?
The term “split dollar” is pretty self-explanatory.
An employer sets up a permanent life insurance policy on a key employee and splits the premiums, cash value, and death benefit between the two.
In this case, U-M pays the premiums entirely, and Harbaugh just pays the taxes.
No one knows for sure how big the face value is on the policy.
…but we do know from public records that U-M is paying $2 million a year for it for a period of seven years, so we can estimate that the death benefit could be as high as $75 million.
All things considered, Harbaugh’s split dollar life insurance policy makes him the top-paid football coach in the NCAA.
While that may not be a surprise, some of the other names among the 25 highest-paid coaches may raise some eyebrows. As college football revenue continues to skyrocket, salaries for coaches continue to go up even at schools that are not traditional powerhouses. The 25 Highest-Paid Coaches In College Football, BusinessInsider.com
5 Reasons the University of Michigan Has a $75M Policy on Jim Harbaugh
1) It Incentivizes Harbaugh To Stay
Coaching positions in the college football world are a constant revolving door. According to Business Insider, the average tenure is 3.8 years.
That’s not even long enough to see the players coaches recruit through to their senior year.
So when Harbaugh signed a seven-year contract with U-M in 2016, the university added the split dollar policy as an extra incentive to see it through.
Harbaugh can borrow from the policy’s cash value at any time, as long as the policy still meets sustainability requirements, and his family gets a big death benefit if he passes away while the policy is in force.
If the policy continues until he retires, he’ll be able to access the cash value then as supplemental retirement income.
Most nonretired U.S. investors have not carefully calculated how much money they will need in retirement or whether their retirement accounts will cover their annual expenses. While one in five say they have done each of these calculations, two in five admit that they have not given much thought to either, and one-third say they have roughly estimated their retirement expenses and revenue. Few Investors Have Calculated Retirement Income, Expenses, Gallup.com
2) Split Dollar Life Insurance Likely Includes Performance Metrics
With a typical deferred-income compensation plan, which is what Harbaugh originally wanted, an employer sets aside a portion of an employee’s income to be paid out when the employee is retired.
These plans typically come with a vesting schedule, so the employee gets the rights to the deferred income over time rather than all at once.
Otherwise, the employer can’t require the employee to meet certain performance metrics to keep the money.
With a split dollar life insurance policy, however, U-M has more control over the contract and likely included some performance metrics in it.
…this means that Harbaugh can’t just coast and cash in.
3) Split Dollar Life Insurance Gives U-M the Control
Currently, the contract states that U-M only has to make seven $2 million premium payments, for a total of $14 million.
After that, the university can terminate the agreement, or it can extend it if everything continues to go well.
What’s more, the policy has a collateral assignment clause.
This means that if Harbaugh chooses to leave U-M at any time during his contract, or the university decides to fire him, the policy is automatically surrendered and U-M gets first dibs at the cash value surrender value to get its premiums back.
4) Split Dollar Life Insurance Gives U-M More Flexibility
Split dollar life insurance contracts aren’t subject to the Employee Retirement Income Security Act (ERISA).
That might not mean anything to you, but hear me out.
ERISA set up a bunch of rules that employers have to follow with certain qualified retirement plans for their employees.
You might be familiar with some of these qualified plans. 401(k)s, SEP IRAs, and profit sharing plans are a few examples.
A split dollar type of life insurance plan, however, is not a qualified plan, so U-M has a lot more flexibility in how it gets to structure it.
Of course, it does still need to meet certain tax and legal requirements. But for the most part, U-M has a lot more flexibility than it would with a typical retirement plan.
5) Split Dollar Life Insurance Is Cheap
I know, I know. Paying $14 million in life insurance premiums over the course of seven years doesn’t sound cheap.
…but in the end, the university’s only effective cost will be an opportunity cost.
Regardless of what happens with the contract, the collateral assignment feature makes sure that the insurance company gets its costs back.
Then whatever amount the policy produces beyond that, Harbaugh or his loved ones will receive it.
So, while it may be expensive upfront, a split-dollar life insurance policy could end up being much cheaper than other similar employee incentives.
Is a Split Dollar Life Insurance Policy Right For You?
Again, whether you’re the employee or employer, there’s no simple to answer this question that fits everyone.
To know for sure, work with an independent agent and share your situation.
Talk about your goals and other options. We can help you design the right solution.
Plus we have access to dozens of insurers and know the ins and outs of their underwriting guidelines…
Which means you will save time, dough & hassle.
Real Superheroes Plan for the Future of their Families
Whether you are considering split dollar life insurance or are in the market for a simple term policy – we can help you bulletproof your families financial future.
Call us today! You may be surprised by how much your loved ones need to continue the life they’ve been accustomed to.
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