Making sense of that $1.5 million figure for Dawn Staley that's not actually a bonus

South Carolina is pulling out all the stops to keep Dawn Staley in Columbia.

But if Staley is still coaching at USC in 2022, she won't receive a $1.5 million longevity bonus, as The State and other media outlets incorrectly reported.

The University of South Carolina board of trustees on April 20 did approve an amendment to Staley's contract involving $1.5 million, but the actual agreement is potentially more lucrative for both parties.

And it's more complicated than a typical bonus.

The university actually entered into what's called a "split-dollar life insurance agreement" with Staley. Such policies have recently been included in contracts with other high-profile college coaches, including Jim Harbaugh at Michigan and Dabo Swinney at Clemson.

Split-dollar life insurance agreements are used by many businesses looking to retain key employees, according to Jordan Smith, vice president of Advanced Design at Schechter Wealth, a wealth advisory and financial services firm based in Michigan.

It "is effectively a loan from employer to employee where the loan proceeds are invested in a cash value life insurance policy. And the policy is designed to minimize the amount of death benefit purchase," Smith said.

"Ordinarily when you think of life insurance, most people think the most efficient way to do it is to pay the lowest amount of premium and get the highest amount of death benefit. When you’re buying a policy for cash accumulation, you want to do the opposite, you want the highest amount of premium for the lowest amount of death benefit, so that your cash can build up more quickly within the policy."

Effectively, Smith said, split-dollar insurance vehicles are investments as much as they are insurance. In most of these arrangements, the loans from the employer only come due if the employee ends the agreement or dies, at which point the employer is repaid from the employee's death benefit.

In Staley's case, the university agreed to make five $300,000 loan payments over the next five years for the life insurance policy, totaling $1.5 million. Under the terms of the agreement, Staley must remain the coach of the Gamecocks for those five years for the payments to continue.

For South Carolina, that $1.5 million will eventually come back — the only cost is the time it will be tied up in the insurance policy, Smith said.

"What it really costs the university is the time value of money on that $1.5 million. Because they're eventually going to get it back," he said.

At the heart of such arrangements, according to experts, is the fact that for many coaches, the life insurance policy is less about a massive payout once that person dies and more about building up a cash reserve that will increase in value over time, tax-free.

And after all premiums are paid, the owner of the policy — in this case, Staley — can borrow money out of it, according to Brent Eden, an adviser at Georgia-based Nease, Lagana, Eden and Culley, an insurance and wealth management firm.

That borrowed money is also tax-free, and while the policy owner has to keep enough cash in the policy to make sure it stays in effect, he or she can still steadily withdraw funds into retirement.

The details of the amendment approved by the board of trustees are not yet public because the contract has not yet been fully executed, a university spokesperson said, and the exact terms of Staley's life insurance agreement are not known. Smith has previously estimated that under Harbaugh's agreement with Michigan, with loans totaling $14 million over seven years, the coach could take $1.4 million out of the policy every year for 28 years — more than $39 million total.

That $39 million, along with any money borrowed from a life insurance policy, eventually comes out from the death benefit paid when the policy owner dies. According to Eden, it is not uncommon for anyone with life insurance to use it as an investment for their retirement years.

As for Staley's policy, Smith said she "probably gets dramatically more value out of it than $1.5 million."

At the very least, Staley will save on taxes. If the agreement had been a longevity bonus or a standard deferred compensation agreement, it would have been subject to federal and state taxes.

Staley remains under contract with the university through the 2024-2025 season. She is scheduled to make a base salary of $2.1 million in the final year of her deal.

This story was originally published April 28, 2018 at 9:12 PM with the headline "Making sense of that $1.5 million figure for Dawn Staley that's not actually a bonus."