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.

RELATED TERMS
  1. Policy Loan

    A loan issued by an insurance company that uses the cash value ...
  2. 412(i) Plan

    A defined-benefit pension plan designed for small business owners ...
  3. Loan Stock

    Common or preferred stock shares that are used as collateral ...
  4. Non-Purpose Loan

    A type of loan that uses an investment portfolio as loan collateral ...
  5. Future Advance

    A clause in a mortgage which enables the lender to advance funds ...
  6. Leveraged Loan Index - LLI

    A market-weighted index that tracks the performance of institutional ...
Related Articles
  1. Financial Advisor

    Boost Earnings Through Financial Planning

    Meeting more of your clients' needs will help you achieve your financial goals.
  2. Retirement

    5 Reasons Not to Borrow From Your Retirement Plan

    Your retirement plan should never be the first place to turn for a loan. Here's why.
  3. Retirement

    Should You Borrow From Your Retirement Plan?

    It makes sense to dip into your savings in some cases, but you must be aware of the potential consequences.
  4. Insurance

    Should You Borrow From Your Life Insurance?

    A loan against the cash value of your life insurance isn't the best way to raise money – but sometimes it's the best choice you have. How to decide.
  5. Retirement

    Sometimes It Pays to Borrow from Your 401(k)

    401(k) loans have been demonized, but they're often the most beneficial source of cash.
  6. Personal Finance

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  7. Insights

    An Introduction to Government Loans

    Government loans further policymakers' efforts to create positive social outcomes by offering timely access to capital for qualified candidates.
  8. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  9. Personal Finance

    Getting Government Loans For Your Small Business

    Would a government loan provide a more cost-effective way to finance your business? See whether your company qualifies for a government loan.
  10. Personal Finance

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
RELATED FAQS
  1. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
Hot Definitions
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
  6. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability of potential investments.
Trading Center