What is Leveraged Benefits

Leveraged benefits are programs in which small business owners or professional practitioners use their company’s receivables or current income as collateral to secure a loan, the proceeds of which indirectly fund their retirement plans.

In a leveraged benefits program, also called a leveraged planning program, the business owner typically purchases a guaranteed annuity contract or a cash-value life insurance policy. They then use the proceeds as a source of secure retirement income that falls outside ERISA regulations. The plan can be established through a financial planner or a specialized insurance agency.

BREAKING DOWN Leveraged Benefits

Leveraged benefit programs are often initiated by small business owners and professional practitioners, such as lawyers, doctors, independent consultants and accountants. These individuals often have high expenses or minimal income, or both, early in their careers. As a result, 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 always possible to make high-enough contributions or earn high-enough returns in the remaining working years to fund a sufficient retirement. A leveraged benefits program allows the owner of an established business with strong cash flow to fund a retirement portfolio that may be worth hundreds of thousands, perhaps millions, of dollars after just a few years to make up for their small initial retirement contributions.

Establishing a Leveraged Benefits Program

To establish a leveraged benefits program, a participant applies for a loan, using both the financial statements of the business and 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 then 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 benefits 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. This means the interest cost is significantly less than what the annuity or life insurance plan earns. These programs are also typically structured to provide protection from downside loss in the market.