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Loss-of-Value Insurance White Pape: Executive Summary

What exists

There are multiple insurance products available to help student-athletes protect potential future earnings in the face of severe injuries during their college career. One is a permanent total disability insurance policy. The NCAA arranges this coverage through its Exception Student-Athlete Disability Insurance (ESDI) Program.  Another insurance product available is known as loss-of-value coverage, which is not offered through the NCAA ESDI Program.

What is covered

Permanent total disability policies, often referred to as PTD insurance, protect a player who suffers an injury or illness during the designated coverage period which prevents the player from ever competing as a professional athlete (i.e., must be a career-ending injury or illness). PTD coverage is 24-hour accident and sickness coverage that includes the playing and practicing of the player’s sport. The benefit amount (usually payable in a lump sum) and pricing is determined by insurance underwriters based on the sport, projected draft position and injury history.

Loss-of-value policies, often referred to as LOV insurance, protect the player’s future contract value from decreasing below a predetermined threshold amount from a significant injury or illness suffered during the designated coverage period. Insurers typically mandate that loss-of-value coverage must be purchased in conjunction with PTD coverage and is typically purchased for the year prior to the player becoming draft-eligible. Similar to PTD coverage, loss-of-value insurance offers 24-hour coverage, and medical underwriting is required. Exclusions for specific pre-existing injuries or illnesses may apply.

How loss-of-value insurance works

  1. Determine eligibility: The insurance company will determine eligibility based on the player’s projected draft status. Only those players projected at the very top of the anticipated draft (e.g., top five or 10 positions) should even consider purchasing loss-of-value coverage. Players projected in later draft positions or rounds may realistically never collect on a loss-of-value claim.
  2. Set threshold: The insurance underwriters will set a loss-of-value threshold which is the specific draft selection, and therefore a specific contract value, in which the athlete must fall below in the draft in order to trigger LOV policy benefits. There is no set standard for LOV policy thresholds as insurers establish this amount based on their unique underwriting evaluation and overall company risk tolerance. LOV policy thresholds can range from an amount below the contract value of the last pick in the draft, to upwards of 60% of the athlete’s projected rookie contract. In rare cases, the threshold could exceed 60%. It is important note that simply falling below the threshold position may not trigger LOV policy benefits. Each insurance provider will have specific requirements which the insured must satisfy in order to be considered for policy benefits.

Example:    

  • Player’s projected rookie contract is four years, $10 million
  • Projected rookie contract x 60% = loss-of-value threshold
  • $10 million x 60% = $6 million total loss-of-value threshold
  • $6 million/four years = $1.5 million annual loss-of-value threshold
  1. Determine benefit: Any benefit payable under a loss-of-value policy is determined by the contract offered.
  • If the maximum contract offer received by the player is less than the threshold amount, solely and directly as a result of a significant injury or illness, the player could be eligible for a loss-of-value benefit.

Example:

  • Projected rookie contract is four years, $10 million total
  • Loss of value threshold is four years, $6 million
  • Player is offered a rookie contract of four years, $5 million
  • $6 million threshold - $5 million offer = $1 million loss-of-value benefit
  • If the maximum contract offer exceeds the threshold amount, the player is not eligible for a loss-of-value benefit.

Example:    

  • Projected rookie contract is four years, $10 million total
  • Loss-of-value threshold is four years, $6 million
  • Player is offered a rookie contract of 4 years, $7 million
  • $6 million threshold < $7 million offer = No loss-of-value benefit payable

Effective practices for purchasing loss-of-value coverage

  1. Determine with the student-athlete and his/her family whether this coverage is appropriate for the student-athlete. Only the very top prospects typically have a realistic chance of ever collecting on a loss-of-value policy.
  2. You get what you pay for. Any company offering a $10 million policy for less than $1,000 is likely not selling a valuable product. The likelihood of ever collecting on a claim under this type of policy is slim. The annual premium per $1,000,000 of quality PTD and loss-of-value coverage may range between $10,000 and $30,000.
  3. Buyer beware. Is the agent selling the insurance policy properly licensed in your state? Have you been clearly presented and explained the terms, conditions, definitions, exclusion, and threshold amount of the policy?
  4. Do your homework. Get multiple quotes and proposals from multiple brokers/insurance agents and insurers. Ask a lot of questions and make sure you understand all terms, conditions, definitions, and exclusions. Ask for terms or exclusions that you don’t like to be removed.
  5. Analyze LOV threshold amounts. It is important to review policy thresholds closely as some coverage offers may include thresholds that are so low that no payout could mathematically be triggered.
  6. Provide all required information and make sure the application is complete and accurate. Err on the side of being over-inclusive when disclosing medical history. Insurance companies have denied claims based on inaccurate or incomplete application data. These denials occur even when the inaccurate or incomplete item had nothing to do with the claim.
  7. Make sure the student-athlete is directly involved in the entire application process, and never sign a blank application that will later be completed by anyone else (e.g., a coach, parent, athletic trainer or insurance agent).  Please also be mindful of state insurance laws which likely do not allow unlicensed insurance agents/representatives to provide insurance advice or services to an applicant.
  8. Third-party consultative services from an independent and unbiased perspective may be necessary to navigate the complexity of loss-of-value proposals, forms, and application processes.

This report is intended for informational purposes only and should not be used as a solicitation or an offer to buy insurance.