• Putting a Better Product on the Court. Perhaps the most significant way that Michigan can improve upon the split-dollar program they entered into with Coach Harbaugh would be to use a better life insurance product this time around. Although details surrounding the insurance policy purchased by Harbaugh are not a matter of public record, reliable rumor has it that the product used was a Northwestern Mutual Whole Life policy. If that is the case, then Harbaugh is almost certain to be disappointed by the amount of cash flow (or lack thereof) that he will be able to squeeze out of that product in retirement without jeopardizing his ability to repay $14 million to Michigan from the residual death benefit. Back in the summer of 2016, when news of Harbaugh’s split-dollar arrangement become public, we at Schechter Wealth ran our own illustration for what we would have recommended (a maximum funded indexed universal life policy with a top-rated carrier), and projected that such a product would have enabled Harbaugh to borrow up to $1.4 million per year out of the policy, tax-free, every single year beginning at his age 65 (year 13 of the policy) and continuing on through age 98 (while still maintaining a residual death benefit in excess of the required $14 million)! With a Northwestern Mutual Whole Life contract, Harbaugh won’t come anywhere close to being able to access that much cash—because of the slow cash build-up and the negative rate arbitrage on policy loans that are long-standing features of Northwestern Mutual products. But fortunately, Michigan has the opportunity for a do-over when it comes to Coach Howard’s split-dollar arrangement, and the indexed universal life products available on the market today are better than ever. Imagine (to pick just one of the many attractive options presently available) a product with cash growth based on an uncapped one-year point-to-point performance of the S&P 500, protected by a 0% floor, that currently (as of late March 2020) offers a 120% participation rate on the upside, and assesses only a 2.5% annual asset charge. Although the insurance carrier has the ability to move the participation rate up or down, that is not any different from the ability of Whole Life carriers like Northwestern Mutual to move their dividend rate up or down—and the historical lookback for this indexed product (based on current specifications, after the asset charge) is several points higher than Northwestern Mutual’s current dividend rate. If Coach Howard is looking for strong future performance that would likely even eclipse what we projected back in 2016 for Coach Harbaugh, choosing an indexed product like the one described here should be a slam dunk.
‘The Team, The Team, The Team’
While some might be inclined to view certain of the provisions described above through the lens of whether they benefit the University (the acceleration clause; charging minimum interest rather than making the loan interest-free) or the coach (advancing all of the money up-front), such a focus is too narrow and loses sight of the motivation for entering into a split-dollar agreement in the first place. At its core, the purpose for a split-dollar insurance program is to promote the long-term retention of a key employee in a tax-efficient manner that provides more benefit to the employee than the relative cost to the employer. It’s not a zero-sum game—in fact, it’s quite the opposite: The program works best when the employee is able to receive the maximum benefit possible from the dollars that are provided, in exchange for expressing a long-term commitment to be part of the employer’s team. The University and the coach are in this together, and for the split-dollar arrangement to achieve its intended purpose, they each need to get what they’re looking for out of it. To paraphrase the end of another famous Bo Schembechler quote: When the University and Coach Howard work together as a “team,” then when the whole season is over…it’s gonna be Michigan again. Michigan.