How Jim Harbaugh’s Life Insurance Make Him One of the Highest-Paid College Football Coaches
Up until recently, Jim Harbaugh was the highest-paid college football coach. Now he’s top 3. But it’s not just because of his generous salary. The genius part is how his life insurance creates income at a level many times what Michigan is paying for it.
We’re going to dive into the mechanics behind this. Specifically, what they did if they were smart and how you can take advantage of the same principles.
Basic Mechanics & What We Know
We know Michigan is paying $2 million a year for seven years. It’s a $14 million loan to pay for Harbaugh’s life insurance.
We know that he will owe the IRS what they call an imputed loan interest by receiving that loan as a type of compensation. But that’s more on the tax side. We’re focusing on life insurance.
For employment incentive, life insurance is all very well and good. But for real incentives, we need something with living benefits. I’m not talking about a long-term care rider, but cash value.
Cash value is part of many permanent life insurance contracts. It builds over time as you pay your premiums. The type of life insurance determines how that cash value accumulates within the policy.
Most people end up ignoring their cash value. Most people also buy whole life insurance, which builds cash value about as fast as a Porche 911 with racing tires in a blizzard.
You can use this cash value to pay premiums on your policy or take out loans. It’s essentially the insurance company saying, “you may borrow this amount from us, and we won’t ask any questions.”
Insurance agents have had a good time guesstimating what the death benefits on Harbaugh’s life insurance contract might be. They range from as low as $35 million to $75 million in death benefits.
We know that $14 million of the death benefit will go to Michigan when he passes away.
We don’t know what type of life insurance, what company, or any details other than the premiums.
If they were smart, here’s what they did
What Michigan and Harbaugh most likely did, is purchased an indexed universal life policy. This focuses on building cash value as fast as possible.
Side note: almost everyone, insurance agents included, have some fiery hate for indexed universal life. It’s difficult to understand — making it a hard sell for agents because confused people don’t buy.
The growth of the cash value ties to a market index, so you know your gains. However, it isn’t directly invested in the market, so you don’t lose your cash value when the inevitable crash comes. The insurer puts a growth floor and ceiling on the policy.
With a 0% growth floor, you never lose money. The stock market could implode, and your cash value would be fine.
On the flip side, the ceiling prevents the insurance company from being on the hook for too much money if there are a few crazy years. The ceiling typically sits between 12 and 14%.
There’s no way he would have chosen whole life insurance. It’s still the most common, but the cash value accumulation is wimpy. Variable universal life was popular in the 80s when superheroes masqueraded as Wall Street investors. But it invests your cash value directly in a market. When the market tanks, your cash value tanks.
The other trick is making sure the life insurance contract passes the 7-pay test. If it doesn’t the IRS classifies his insurance as a modified endowment contract (MEC) and gets to tax it. Think advisor explains the mechanics of MECs and the 7-pay test particularly well if you want to dive into that.
Fun note: the government has regulations preventing insurance companies, agents, and their staff from advertising life insurance as an investment.
If they were smart, they put together an indexed universal life policy with the minimum possible death benefits. (The government also regulates what you’re allowed to charge for varying amount of death benefits.)
This sounds like crazy-talk. But the more you pay in premiums, the faster your cash value grows. People who use life insurance to build up cash value aren’t interested in the death benefit — it’s only there to skip taxes.
How this will likely play out
Harbaugh can borrow at any time from his life insurance. If he wants to pay himself a little extra this year, he can do that. If he wants to buy a yacht, he can do that. If he wants to hire a private jet to take his whole staff for a boss-paid vacation in Fiji, he can do that.
The only thing he can’t do is borrow so much that the death benefit can’t pay back Michigan’s $14 million when he dies.
Still, it takes time to build up cash value in an insurance contract. Most people wait at least a decade or until they retire.
One of the big appeals of using this cash value is an additional retirement income stream. Since you never have to repay the loan against your cash value, you can borrow a fixed amount each year to supplement your other retirement income.
When you borrow money, it’s tax-free. Technically, the life insurance company is providing you with a loan. Your death benefit is the collateral. The interest rates typically sit around 5%, but you don’t have to repay that either.
Retirees will keep taking out loans pretty much indefinitely without paying back a cent.
But here’s the kicker that makes this whole strategy work.
The cash value growth is based on the full amount — not the total amount minus your loan(s). For example, let’s say you have $1 million in cash value and take out a $500,000 loan. The next year’s growth will build off of the total $1 million amount. It doesn’t matter that the current available amount is only $500,000.
Oh yeah, don’t forget compounding.
The whole concept blows my mind. However, it’s not a super-high return rate when you take in all of the investment opportunities available with the kind of income that gets you one of these policies. Crazy inflation can screw up this strategy. Many bad years of stock market losses can wreck cash value growth, even with the 0% floor.
But if you can get your company to pay for this? Where’s the loss?
Can normal people do this?
Only the top 25% of income earners in this country can reasonably get an IUL with this design. By the way, the top 25% is only about $60,000 year gross.
Even if you can get an IUL making less than $60k per year, the numbers don’t always make good sense. There are better ways to invest your money, and putting in the kind of premiums needed can make living expenses tricky.
Let’s say you’re a 41-year-old man. You have an agent design an IUL for you where you pay $10,000 in premiums each year.
(Two pitfalls here. First, most agents don’t have experience with IULs, so screen carefully. Second, you have to be in good health. Premiums will be too high at a standard health class, so get into the preferred or preferred plus category if you can.)
You pay those premiums until your 67, at which point you retire. That’s $260,000 going toward this policy.
Averaging market returns over that time at 7% (which we both know it doesn’t behave like that), your accumulated value would be right around $741,000.
You start borrowing $68,000 a year. But your account value still goes up.
- Age 67 — $741,844
- Age 68 — $797,744
- Age 69 — $857,240
- Age 70 — $920,471
- Age 80 — $1,836,402
- Age 90 — $3,503,926
Isn’t compound interest a beautiful thing?
Compare this to a 401k, where you have a set amount. It’s your job to predict your lifespan and spend your nest egg accordingly. Because unless you go back to work, you won’t get any more.
Less fun, right?
But what about the bottom 75%?
I regret that we are SOL on indexed universal life policies. But it’s a nice thing to aspire to once you build up your income to his that $60k mark.
Plus, it’s also an alternative to “safe” investments. Remember that average 6% to 8% interest? It’s not great returns for building wealth if you don’t start with much capital.
Conversely, average 7% interest over 20 years is way better than returns on most other “safe” investments like CDs.
There are other tax-advantaged ways to invest money. Making out your 401k to an employer match or your IRA each year is an excellent first step. Learning different investing strategies is a good second step.
Then there are all of the passive income strategies floating around the internet. They take either time or money.
Of course, income is the biggest challenge, right? You can read Ramit Sethi’s “I Will Teach You To Be Rich,” but he’ll tell you right in the intro that unless you’re making $50k a year, there isn’t much he can do for you.
I wish I had better news in this section, but there is no sensible way to make indexed universal life work under a top 25% income. At this point, the standard life insurance strategy would be a term policy to cover children/spouse/mortgage and invest the rest.
Obligatory disclaimer: I am not a financial advisor. I let my insurance license lapse years ago when I switched into a ghostwriting career.
I ghostwrite oodles of articles on un-sexy subjects that buffer people against life’s chaos. Take advantage of this research through a weekly newsletter rounding up strategies, insights, and done-for-you guides.