While teaching a class, someone asked a question about over funding a cash value life insurance policy. They mentioned hearing someone discuss it and didn’t know if it was a good idea. I explained to the class that there are pro’s and con’s to every financial strategy and the key, regardless of the type of product, is making sure it is properly structured. Her follow up question was why she had never heard it taught before. If you know where to look, there are numerous stories of people using these types of strategy. ESPN wrote the following:
Division-1 Football Coach Jim Harbaugh agreed to take his bonuses from the University of Michigan in the form of premium payments into an over-funded life insurance policy?
Jim is so happy because the University of Michigan agreed to pump in $2,000,000 of premium per year into Jim’s policy for 6 straight years.
That’s $12,000,000 of over-funded premium that will grow in Jim’s policy immune from taxes and provide him with tax-exempt distributions in the future. All while being insulated from market volatility.
Jim’s policy is not an anomaly either. Clemson University did the same thing for Dabo Swinney (for $1,000,000 of annual premium) right after he helped them win the championship.
In General Electric’s Annual Statement each year they list the top executive’s compensation. If you look closely you will notice that ALL SIX of them have chosen to only take $9,275/year in Tax Deferred Compensation into their retirement plans (401k). Each of them has instead opted to have anywhere from $92,000 to $445,000 each year placed into the cash value of an insurance policy that they will be able to access Tax Free.
Now these are obviously “large” examples of what people can do, but the same thing happens every day for people who save even a few hundred dollars each month. The real question, as my student proposed, is how come I have never heard someone teach on this. With each product or service that exists in the financial planning world, someone has a bias as to whether they will discuss and promote it, or not. Why wouldn’t someone want you to know about this product?
