Jim Harbaugh, former coach of the San Francisco 49ers, and just entering his second year as head coach of the University of Michigan football team has struck a deal with the university to borrow money from them… to buy life insurance.
Without interrupting his $5 million annual salary contract, the university is now going to loan him $5 million this year and $2 million a year that he remains the head coach there in order to buy life insurance.
Ed Slott is a CPA and a nationally recognized expert on I.R.A.’s. Not only did he write a best-selling book “The Retirement Savings Time Bomb and How to Diffuse It”, his educational television specials can regularly can be watched on Public Broadcasting Stations (PBS) across the country. He knows his stuff.
In his book he writes, “I’m not a shill for the life insurance industry – I don’t sell life insurance… but life insurance is the single biggest benefit in the tax code. It is important to look at life insurance… as a solution to a problem.” Apparently Jim Harbaugh and 1,000’s of non-celebrities like him agree.
According to Sports Illustrated, “if Harbaugh leaves Michigan for any reason, they will stop the payments on the loan, but he does not need to repay the loan until he dies, as long as the insurance policy remains active. The maturity date for the loan is Harbaugh’s death, at which time Michigan will be repaid the entire loan balance.” This is a huge additional incentive for him to remain coaching there for many years.
I’m guessing the death benefit of his policy is somewhere in the range of $70 million – depending on how the policy is structured. That figure would be for more of an estate planning goal rather than the tax-free retirement distributions that most of my own clients are interested in. If he wanted to set up the policy to throw off millions of tax-free income distributions throughout his retirement, I’m estimating the initial death benefit would be in the $35-40 million range and grow every year as premiums are paid. That’s how I structure my own life insurance policies.
Borrowing money to purchase life insurance is nothing new for the wealthy. And the premium funding strategies are now better than ever. A new colleague and friend of mine has done similar deals for two different NFL team owners (no – I cannot name them).
This type of strategy is one great example of the power of life insurance when used in executive compensation packages as well as for small business owners. But most of my clients usually set the policy up to provide for supplemental tax-free retirement cash-flow.
More and more corporations see the value in using life insurance as a component of owner/executive compensation. Don’t be surprised to hear more highly-paid executives implementing this type of design as a win-win that adds tremendous value to their pay package, future retirement and legacy plan. Harbaugh and those like him stands to receive extraordinary financial benefits through a highly efficient and savvy funding structure.
But you don’t have to be “rich” to take advantage of these programs. A small business owner or highly paid professionals can take advantage of borrowing at extremely low rates to help in your retirement planning.
One of the new programs that I work with allows clients with as little $125,000 of annual income can get banks to loan them up to 75% of their premiums to increase their eventual retirement income on a tax-free basis. They’ve lent over $1 BILLION for funding life insurance policies with the life insurance contract being the ONLY collateral. I’m trying to figure out how I can afford to add a 6th life insurance policy to my own portfolio to dramatically increase my future tax-free retirement.
And for people who have a net worth of as low as $5-6 million, 100% of the premiums can be loaned with very attractive terms and flexibility. Whether for their family’s benefit or for a charity, it’s a powerful financial strategy worth exploring.
Certainly none of this is appropriate for everyone, but for the right person, it could add $1,000,000 to $3,000,000 of tax-free cash-flow during retirement as well as provide a tax-free death benefit “kicker”.
If you know someone that might want to learn more about how to use other people’s money to get all of the tax and financial advantages of life insurance… please let me know.
All the best… Mark