Split-dollar life insurance has long been in the GFD playbook for high-net-worth individuals. Increasingly, elite college athletics programs are leveraging this approach to recruit and retain coaches.
What is split-dollar life insurance and how does it work?
At its core, split-dollar life insurance is an arrangement in which two or more parties — typically an employer and their employee — agree to share the expenses and the benefits of a life insurance policy. This splitting up — hence the name — is typically carried in one of two ways: by endorsement or by economic benefit. In either case, it's the employer that owns the policy. There are alternatives in which the employee is the owner and the employer lends money to service the premiums. For simplicity sake, however, we'll focus on the employer-ownership arrangement exclusively.
As explained by Nerdwallet, the endorsement method means the employer surrenders a portion of the proceeds from the policy to their worker(s). The employer may also agree to lend money to the employee to use for investing in the policy, which can help the policy to accumulate value. In the latter, it pretty much works the same way, in that some of the benefits go to the employee, but those benefits are taxable and do not include a loan. The degree to which benefits are taxed depends on the policy's value, which is ultimately decided by the IRS or the insurance company that sold the coverage.
Whichever framework is decided on, the thrust of split-dollar life insurance is paying the highest premium for the lowest death benefit. Toward this end, policy charges are minimized and the cash value accrues faster than it would otherwise. That money may be utilized by employees down the road by withdrawing from the policy or by borrowing the money.
In addition to split-dollar life insurance serving as a highly effective and convenient estate planning tool, several Division I colleges and universities have turned to it as a way to recruit and reward coaches.
One of the latest examples is Louisiana State University. As LinkedIn reported last year, on the heels of the LSU Tigers defeating the Clemson Tigers 42-25 in the 2019 College Football Playoff National Championship — its third title since 2003 — the university re-signed Ed Orgeron to a six-year contract extension valued at approximately $42 million. Included in that compensation package was a split-dollar life insurance arrangement worth $5 million.
While the full details of the policy have not been disclosed, LSU and Orgeron will share in how the premiums are paid, the resulting death benefit and accumulated cash value.
Clemson, Michigan among others to leverage split-dollar life insurance
The Bayou State-based Division I powerhouse is just the latest to utilize split-dollar life insurance for recruitment, reward and retention purposes. For example, in 2019, the Clemson University extended defensive coordinator Brent Venables contract. In addition to ensuring Venables remained the Tigers' DC for the 2020 season, the retention bonus came in the form of a split-dollar life insurance policy worth an estimated $200,000, as reported by the Clemson Insider. Should he decide to do so, Venables will be able to withdraw money from the plan and use it as an annuity, perhaps when he decides to retire.
Clemson Deputy Athletics Director Graham Neff told the university newspaper that the split-dollar life insurance arrangement is structured so some of Venables' earnings go toward the policy, so it can increase cash value over time.
"We take a portion of their salary and invest it in a long-term life insurance instrument, whereas at a future time the employee will receive an annuity, a pension in a simple sense, and some sort of a death benefit," Neff explained. "It is a life insurance policy."
Around the same time, the athletics department at Clemson also restructured co-offensive coordinators Jeff Scott and Tony Elliott's contracts so they too could leverage split-dollar life insurance, The Clemson Insider reported. Scott has since moved on and is now head coach for the University of South Florida Bulls. Elliott remains on as offensive coordinator at Clemson and as tight ends coach.
Harbaugh, Michigan come to an agreement
Perhaps the best known Division I football program and coach to utilize split-dollar life insurance financing for retention and contract extension purposes has been the University of Michigan and Jim Harbaugh. Prior to the kickoff to the 2016 college football season, it was widely reported that the perennial Big Ten Conference powerhouse and Harbaugh entered into a split-dollar life insurance agreement. As Think Advisor explained, the specifics of the arrangement had Michigan making seven loan advances to Harbaugh of $2 million each, which he could use to pay down the premiums of the life insurance plan 100% tax-free. It also permitted Harbaugh to avoid paying the loan back for the rest of his life; his family could take care of this after his passing through the cash value it accumulated and retain what's left of the death benefit.
More employers are taking advantage of split-dollar life insurance as a recruitment and retention resource. Yours can be next. Contact Global Financial Distributors to learn more about how this arrangement can help your business score.