Life insurance as an executive perquisite was in the news recently when the University of Michigan agreed to loan its head football coach, Jim Harbaugh, $2 million per year for the purpose of acquiring a life insurance policy. Let’s review the transaction from each party’s perspective.
From Michigan’s perspective, it’s a low cost way to further tie the coach to the school. Head coaches at top football schools are in demand and cost a lot. The only cost to the university for this perquisite is the lost interest on the loan, which in today’s interest rate environment, isn’t very much.
The loan is structured to last for the length of the current contract, which runs through December of 2021. The first installment of the loan was made on June 3, 2016 and future installments will be made on December 6th of each year that Harbaugh is the coach. While the university will receive no interest on the loan, it will be repaid the principal either when Harbaugh leaves or when he dies. So from the university’s perspective, that is a low-cost method to further cement the relationship between the employer and the employee.
From Harbaugh’s point of view, it also makes sense. I don’t know the man, but given his $5 million current compensation package, he probably (hopefully) doesn’t need any additional spending money. He is 52 years old and now that he is financially secure, perhaps his thoughts have turned to his children and future grandchildren.
Depending on his health and objectives, the series of loans could buy a policy with a face amount upwards of $50 million. From the face amount, the university will be repaid the money it advanced him.
The addendum to the contract that authorizes the loans allows Harbaugh to own the policy, which is a big benefit to the coach. It allows him to name/change the beneficiary and take loans from the policy.
From reading the article, it sounds like the university will have an assignment of the death benefit for their interest in the policy. That means that if, hypothetically, Harbaugh dies after the university has advanced him $10 million, they would receive that amount and his beneficiaries would receive the balance.
This type of transaction is not uncommon in business. Granted, the size is uncommon, but not the transaction. Many companies advance select employees more modest amounts to procure life insurance and structure the transaction so that they will ultimately be re-paid their advances, either at death, retirement, or separation from service.
So from both an employer and an employee perspective, this type of transaction makes economic sense. It costs the employer little to provide a significant benefit and the employee gets coverage that he otherwise might not have. Win-win.