Split Dollar Insurance-An Exploration
Split Dollar Plans in the Sports World
It’s not often a story involving life insurance makes it into the headlines of the mainstream media, but that’s exactly what happened recently when virtually all of the major media outlets picked up on the news of the split dollar plan the University
of Michigan entered into with its head football coach Jim Harbaugh. When you add a larger than life sports figure like Harbaugh to the mix, people tend to take notice, and this was one of the few times life insurance and split dollar in particular received national media attention.
While split dollar has been used by astute employers as a recruitment-retention tool for over 60 years, the terms of most split dollar plans are typically private, which in part explains the fascination with Jim Harbaugh’s arrangement with Michigan, as well as the fact that split dollar plans have managed to fly under the radar out of public view for so many years. In this case however, Michigan is a tax-exempt entity, so the terms of the split dollar plan were available for public disclosure.
According to published reports, Michigan and Harbaugh agreed to a contract extension-amendment in 2016 that, in addition to paying him $5 million of salary for each of the remaining six years on his contract, would also require Michigan to loan Harbaugh $4 million in 2016 and an additional $2 million for the following five years to pay the premiums on a life insurance policy. Insurance experts have estimated that given the size of these premiums that the policy’s face amount for a person
Harbaugh’s age would be approximately $75 million. When this information hit major media outlets like ESPN, ABC, CBS and NBC, the reaction of many who had no previous exposure to this particular planning technique was: “What is split dollar and how can I get a plan like Harbaugh’s?”
While Harbaugh’s split dollar plan involved the head coach of a major college football program, insurance insiders know that split dollar has long been used by for profit businesses of all sizes to recruit, reward and retain their top performers.
Because split dollar combines a party with the ability to pay the premiums (Michigan) with a party that has a need for
life insurance coverage (Harbaugh), it is often included in the fringe benefit “package” offered to top performing employees. Employers like split dollar because they get “cost recovery” and can pick and choose who gets covered, while participants appreciate the fact that they can provide their families with size-able death benefit protection for very little after-tax cost.
Pays all premiums
Death benefit split between employer and beneficiary
Owned by employee and collaterally assigned to employer
Premiums returned from cash value; Harbaugh retains ownership
If he dies If he leaves
A quick review of Harbaugh’s split dollar plan demonstrates these advantages:
- Jim Harbaugh is the policy owner and each year Michigan “loans” the premiums to the insurance carrier on Harbaugh’s behalf.
- To secure its premium loans, Michigan places a “collateral assignment” on the policy which ensures that it gets its premium loans back in the event Harbaugh dies, separates from services on account of being fired or taking a job in the NFL.
- One of the simplest ways to understand a split dollar transaction is to analogize Michigan’s role to that of a bank, with their collateral assignment on the policy being akin to a “mortgage” on Harbaugh’s policy. In order for Harbaugh to own his policy outright, he needs to pay off Michigan’s loan,
which can be viewed as a retention tool that helps incent Harbaugh to stay with Michigan.
- The terms of the split dollar agreement stipulate that if Harbaugh dies, the insurance carrier gives Michigan its premium loans back through the death benefit split while Harbaugh’s family gets the balance of the policy’s death benefit.
- If Harbaugh separates from service on account of being fired or taking an NFL head coaching job, Michigan’s collateral assignment interest ensures that they get their premium loans back from the policy’s cash surrender value. Once Michigan’s assignment is taken off the policy, Harbaugh gets to keep the policy and the remaining cash surrender value.
- Because Michigan is loaning the premiums on Harbaugh’s behalf to the carrier, the IRS requires that Harbaugh include interest from Michigan’s premium loan in his income annually. Harbaugh’s annual interest costs is calculated by multiplying Michigan’s cumulative premium loans by the so- called “Applicable Federal Rate”(AFR). With AFR running at
historical lows, it made good financial sense for Harbaugh to enter into a so-called “loan regime” split dollar plan.
Advantages of Split Dollar Plans
- Provides a way for you to reward and retain a key executive through a benefits package that addresses the executive’s personal planning needs.
- Split dollar arrangements can be offered to select employees without regard to other employees. There is no IRS approval required.
- You can decide if you want your business to fund the entire premium, or have the executive pay for a portion of the premium with the business loaning the rest.
- There is recovery to the business for the premiums loaned, from the cash values or the death benefit, through the collateral assignment of the policy.
- For the executive, they will receive valuable life insurance protection with little out-of-pocket expense during his or her working years.
- The executive will also have the right to a portion of the cash values during his or her lifetime. In addition, there are no adverse tax consequences to the business or executive from the buildup of cash values inside the policy, even if the cash values exceed the cumulative premiums paid.
Before Jim Harbaugh was recruited to be Michigan’s head football coach, the team suffered through a number of losing seasons. His NFL playing career, followed by his even more successful NFL and college coaching career, made him a nationally recognized figure. It is little wonder that Michigan turned to split dollar to reward such top talent as Harbaugh.
The question remains, are you ready to do the same for your top employees?