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You could safely say that college football is life in Michigan … and that would still be an understatement…
The Michigan Wolverines first took the field in 1879, roughly a century-and-a-half ago. Since then, they’ve won 12 claimed national titles (along with 7 unclaimed).
Michigan stadium, aka “the Big House,” is the largest stadium in the Western hemisphere, seating crowds of up to 115,000. Crowds that often stick around after the game to sing the university’s alma mater before going home.
College football is that serious for the University of Michigan.
But as any college football fan can tell you, it’s a fickle sport. Your best talent graduates every four years. Divisions fluctuate from season to season. And a team’s culture is defined by its leadership, for better or worse.
So in 2014, when the Wolverines finished with a miserably 5 wins & 7 losses (missing out on a bowl game for only the third time in nearly 40 years) it was time for a change. They needed a new head coach. And since this was the University of Michigan, they weren’t going to spare any expense.
The university ultimately found its man in Jim Harbaugh, legendary-quarterback-turned-head-coach and a master of the game at both the professional & collegiate level.
Harbaugh’s impact on the team was immediate. Early in his first season, he put Michigan back in the AP top 25 for the first time in two years, before guiding his team to a Citrus Bowl blowout win, scoring 41-7 against a solid team from the University of Florida.
It was the ultimate turnaround story. The kind of thing that Hollywood makes exciting sports movies out of. And none of it would’ve been possible without whole life insurance …
Yes. I realize that sounds a bit zany. But hear me out …
You see, the University of Michigan really wanted Jim Harbaugh. They knew he’d be worth it. So they came to the table with a relatively typical deferred compensation agreement.
Deferred compensation is a popular choice for sports teams, since it provides them with flexibility and incentivizes the kind of loyalty that can win championships over time. Dodgers pitcher Shohei Ohtani notoriously deferred some 98% of his $700 million Dodgers deal to maximize his income.
Instead, Harbaugh and his representatives pushed for what’s called “split-dollar life insurance.” This is a type of policy (usually whole life insurance) where the employer and the employee share the funding costs. In Harbaugh’s case, that means receiving a series of seven load advances valued at $2 million each, which will be used to pay policy premiums.
That’s just a loan, too.
The university will ultimately be repaid out of the policy’s death benefit. Until then, Harbaugh will reap massive financial benefit from the tax-deferred growth of his fast-tracked policy. He’ll have access to millions in tax-free liquidity through loans against his cash value. And he’ll have one of the most powerful estate planning tools in the world at his disposal.
That last part is crucial, too …
The University of Michigan was making an investment in Harbaugh and his family’s legacy … in return for his investment in the university’s legacy. It’s an amazing way to align incentives — as evidenced by Harbaugh’s immediate bowl game win.
While this kind of deal is relatively unprecedented in the world of college sports, split-dollar life insurance has long been a common feature of Wall Street compensation plans. Working much like an “Executive 401(k),” life insurance can provide a unique array of tax benefits and estate planning tools that are indispensable to any well-funded portfolio.
For example, based on the terms of Harbaugh’s agreement with the University of Michigan, his beneficiaries will only have a guaranteed cash benefit of $1.12 million until he reaches age 70.
After that, the total benefit will depend on how much the policy has grown. And once again, the balance of his loan isn’t due until his policy is paid out. Regardless of whether he lives to 80 or 90 or 115 years old, he’ll keep all except the initial $14 million investment made by the university — which will continue to grow and compound, tax-deferred all the while.
If we account for the fact that Harbaugh is a lifelong athlete in spectacular heath at 61 years of age, 6 foot 3 and 215lbs? His life insurance policy likely ensures that he’s one of the best-paid coaches in the history of college football.
Life insurance can also be a powerful tool for estate tax management. At the moment, estates worth more than $14 million are subject to estate tax (depending on several factors), yet Jim Harbaugh has an estimated net worth of about $40 million.
Harbaugh was a wealthy 50-year-old when he first signed with the University of Michigan, so he was likely already thinking about his future. Signing a massive cash deal with a new team might just mean signing up the IRS for a lucrative new income deal (even after he passed away).
Life insurance, on the other hand, can be a powerful tool for managing the impact of taxes (including estate tax) depending on how it’s structured. Life insurance can backstop his other investments, provide a valuable volatility buffer in case anything else goes wrong, along with countless other benefits along the way.
But the greatest benefit of life insurance as compensation is simply that power to align incentives. It’s a way for both parties to ensure each other that they’re in it for the long haul. And as any successful entrepreneur or executive knows, great compensation is the secret to unlocking great performance.
In Harbaugh’s case, that meant delivering three consecutive Big Ten Conference titles after coming on as head coach. In 2023, after 8 years of hard work, Harbaugh led the Wolverines to their first national championship in over a quarter-century.
Moral of the story?
Paying your people well is just about dollars and sense. It’s about finding the right vehicle to empower your highest performers to deliver on their greatest passion and potential.
Ready to see how this could apply to your wealth plan? Click the big yellow Clarity Call button and let’s map it out together.
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