Cash value life insurance makes Harbaugh college football’s top-paid coach

Related: 10 advantages of term life insurance

Assuming that Harbaugh qualifies for preferred medical underwriting (which seems a reasonable assumption, given his well-documented physical activity), he could get a policy with an initial death benefit of $35.6 million, which could grow to as much as $49.3 million by the time all premium payments have been made.

We then project that he could begin taking $1.4 million per year out of the policy, income-tax free; beginning at age 66 and continuing all the way through age 98 (should he be fortunate enough to live so long).

At the same time, his heirs would receive a residual death benefit (net of the amount owed back to the University) that reaches as high as $35.3 million — if he dies after all premium payments have been made, but before he begins taking cash from the policy — and then gradually reduces as he draws money out of the policy until it drops to the minimum of $1.3 million following the final distribution of $1.4 million at age 98 (after having pulled $46.2 million out of the policy tax-free). 

The only income tax that Harbaugh will pay on the transaction is a tax on the “imputed loan interest” that the University is not charging him. That will be calculated based on a minimum interest rate set by the IRS. This imputed interest rate will vary as the rate that applies to each premium advance will be the rate that is then in effect for the month in which that premium is paid. But the current low interest rate environment provides a tremendous opportunity to keep Harbaugh’s income tax cost to a minimum.

Although there are clearly other, non-tax, factors at play, the University could eliminate all variability by advancing the entire $14 million up front and locking in today’s low interest rate of 1.9 percent (September 2016). This would generate annual taxable income to Harbaugh of $266,000, which equates to just under $127,000 in combined Federal, State and Affordable Care Act tax at today’s rates.

Useful, multipurpose strategy

Insurance-based solutions, like the one used to provide Jim Harbaugh with millions of dollars of tax-free cash in retirement, are not just limited to high-profile football coaches.  For example, we recently designed and helped implement a remarkably similar transaction that will provide a 55 year-old executive currently making around $250,000 per year with $100,000 per year tax-free during retirement.  The strategy provides the employee with the equivalent of a deferred compensation plan that pays roughly $150,000 per year, while costing the employer noticeably less than that.  It can also strengthen the relationship between the employer and the key employee, and provide incentive for the key employee to remain with the employer until retirement.

Editor’s Note: Schechter Wealth had no involvement in Jim Harbaugh’s contract or the use of insurance and investment products to create his specific program.

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