Leveraged Benefits


DEFINITION of 'Leveraged Benefits '

The use – by a business owner or professional practitioner – of their company’s receivables or current income to secure a loan whose proceeds then indirectly fund a retirement plan. In a leveraged benefit program, also called a leveraged planning program, the participant purchases a large guaranteed annuity (such as an equity-indexed annuity) or a large cash-value life insurance policy (such as a single premium indexed universal life policy) that helps provide secure retirement income that falls outside ERISA regulations and matches the high income of the participant’s working years. The plan can be established through a financial planner or specialized insurance agency.

BREAKING DOWN 'Leveraged Benefits '

Since business owners and professional practitioners (such as lawyers, doctors, independent consultants and accountants) often have high expenses and/or minimal income in their early years, they may not be able to make significant contributions to their retirement accounts until later in their working lives. By that time, it is not possible to make high-enough contributions and/or to earn high-enough returns in the remaining working years to fund a sufficient retirement income. Leveraged benefit programs allow the owner of an established business with strong cash flow to fund a large retirement portfolio worth hundreds of thousands – or millions – of dollars over just a few years to make up for their small initial retirement contributions.

To establish a leveraged benefit program, the small business owner or professional practitioner (the participant) applies for a loan, using both the business’s financial statements and his/her personal financial statements to help the bank determine how much it is willing to lend. The bank lends the participant funds as a lump sum or a series of payments over several years. The participant uses the loan proceeds to purchase a guaranteed annuity or a cash-value life insurance policy, which often becomes the loan collateral; the participant’s receivables or income, or even personal assets, may also serve as collateral. The participant repays the loan over five to 10 years, according to the loan terms. When the loan is fully repaid, the bank releases its claim to the collateral.

The loan that funds the leveraged benefit plan usually charges simple interest, but the proceeds are used in a way that earns compound returns. In addition, the loan interest is often a tax-deductible business expense. Thus, the interest cost is significantly less than what the annuity or life insurance plan earns. In addition, the programs are typically structured to provide protection from downside loss in the market.

  1. Debt/Equity Ratio

    Debt/Equity Ratio is debt ratio used to measure a company's financial ...
  2. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  3. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  4. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  5. Mandatory Distribution

    The amount an individual must withdraw from certain types of ...
  6. Auto Enrollment Plan

    An employer’s decision to sign employees up to have a percentage ...
Related Articles
  1. Retirement

    3 Ways To Make Your Retirement Funds Last

    These retirement income distribution methods are all viable; the one you choose will depend on your personal circumstances.
  2. Budgeting

    How To Budget Your Retirement Funds And Still Have Fun

    Here are some tips to budget your remaining money when you are retired.
  3. Retirement

    6 Ways To Calculate How Fast You'll Run Out Of Retirement Funds

    One of the key aspects of retirement planning is determining the amount of time that it will take for you to exhaust your retirement savings.
  4. Home & Auto

    Tap Retirement Funds To Buy A Home?

    It's not ideal, but there are times when it can make sense to use your IRA or 401(k) for a down payment.
  5. Options & Futures

    Retirement Funds To Fund Startups

    Retired entrepreneurs who have "played it safe" and retirees who want to stretch their dollars are looking to invest here.
  6. Budgeting

    Pay For A College Education With Retirement Funds

    These savings vehicles may be better than college saving funds for some families.
  7. Retirement

    10 Ways to Save Your Retirement: It's Not Too Late

    It's not too late to start saving for your retirement, even if you took longer to start thinking about it and doing something about it.
  8. Retirement

    5 Ways to Use Your Home to Retire

    Retirement is going to cost a lot, and for homeowners who face a shortfall, their home can be a source of income. From downsizing to renting, here's how.
  9. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  10. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  1. Can I hold non-dollar currencies in my retirement fund?

    Yes. You would need to find a financial institution that can facilitate these currencies in a retirement account. Many are ... Read Full Answer >>
  2. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  3. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  4. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  5. How can I determine if a longevity annuity is right for me?

    A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
  6. How are variable annuities taxed at death?

    If the owner of a variable annuity dies before receiving full payment, his beneficiary must pay taxes on any earnings received. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!