Protect the Net: Evaluation of Disability Insurance for Athletes, Part 2
In Part 1 of this article we discussed the importance of Permanent Total Disability (PTD) and what to look for when acquiring it. For this part let’s turn our focus to Loss-of-Value (LOV) insurance.
Remember that PTD covers an athlete in the event of a career-ending injury. LOV, on the other hand, provides a benefit for those who continue to play their sport but at a salary much less than what their market value was before injury or illness.
It was designed to protect professional athletes or collegiate athletes expecting to go pro should they get hurt or become sick between now and their big pay day. LOV does not replace current income, but softens the blow if their value takes a dive.
For an insurance carrier to calculate a player’s loss-of-value, they must first project the player’s market value at the time of their contract signing. A carrier may use multiple resources to come up with that number but relies heavily on contracts signed by similar athletes.
Once fair market value has been assigned, the insurance carrier sets a disability threshold at around 60% of the market value – a level considered to be an outright decrease in the athlete’s value.
The threshold is what determines eligibility of a claim. Generally speaking, a claim is triggered the moment an initial contract offer that falls below the threshold is made.
Important things you should know about LOV:
- Be sure to understand how the LOV benefit is calculated and understand the risks. Some carriers use a Pro-Rated method while others use an Aggregate. Either can prove beneficial depending on your situation. One method may appear to provide more benefit than the other depending on how its calculated. Claims can be paid either at the time of disability or long after the injury or illness occurred. And, there’s a significant risk in either case of losing the benefit all together should an athlete regain their value.
- Determine which method fits your particular need. Consider what type of contract the player would sign at the backend of a devastating injury/illness. Would they sign a long-term contract or 1-2 year deal? These policies were developed for elite athletes and if there is any inkling of the player regaining their ability following a devastating injury one method may certainly be better than the other.
- Finally, be sure to disclose any prior injury or major ailment before the policy is written. Let’s be honest, when it comes to paying a $7 million, $5 million or even a $3 million claim, an insurance carrier will perform a decent amount of due diligence to adjudicate the claim. They will be especially interested in any previous injury or illness, not disclosed during the underwriting process.
As my friend, Noel Paul, an attorney at Reed Smith LLP, will tell you, “Full disclosure of any prior injury or illness from sport or otherwise is your best defense in the event of a disputed claim.” Even if the athlete broke their wrist falling out of a tree at Grandma’s house when they were twelve, the insurance company should be made aware.
LOV insurance is certainly not for everyone, but in the right circumstance and as part of a comprehensive financial strategy, it can make all the difference.
To discuss Part 1 or future updates on specialty insurance programs including Temporary Total Disability (TTD) and Deferred Compensation Programs involving cash value life insurance, please contact me here.
Sales Executive, Benefits
This post was originally published in February 2017; updated July 2021.
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