There is probably no greater example of the term “Human Capital” than high-priced athletes. The body that allows them to throw a football 60-yards with pinpoint accuracy, slap a puck 100-miles-per hour, throw a baseball with a devastating curve and put a ball nine-inches in diameter in a hoop barely twice the size from over 40 feet out, is one of the most valuable assets on the planet. And as befitting this status, that body—which will always seem to be in harm’s way—should be protected in the event that next big payday gets taken off the table due to a serious, potentially career-ending injury.
A sport that seems to define these criteria is major league baseball, where contracts are guaranteed and relatively iron-clad. It’s a high-stakes playing field where the average salary in 2013 was just a tick over $3.2 million and everybody plays for that next big contract. But at what risk? It’s a question advisors must ask themselves as we head into another Hot Stove baseball season where nine-figure dollar amounts get off-handedly tossed around like a roomful of Wall Street investors.
Case in point is Boston Red Sox outfielder Jacoby Ellsbury. In 2013, the young player was in his free agent year making $9 million per year. After a slow start, his stats started to climb, leaving even the usually acerbic Boston Globe writer Dan Shaughnessy to comment, “It’s looking more and more like (agent) Scott Boras will be able to get $100 million for Jacoby Ellsbury.” But it was also noted that Ellsbury has been injury-plagued over the years, resulting in missing practically the 2010 and 2012 seasons due to serious injuries. Without the proper protection in place Ellsbury was doing a financial high-wire act since the opening pitch of the 2013 season. Fortunately, he skated unscathed through the 2013 season, and pulled down impressive numbers in the post-season. As it turns out Ellsbury gambled and won as he signed last December a seven year, $153 million contract with the New York Yankees. But if he gambled and lost, that’s a lot of potential money to leave on the table.
Perhaps a better scenario is that of New York Yankees’ second baseman Robinson Cano, who fulfilled his current contract with the last pitch of the 2013 season. With little or no injury record, Cano could afford to gamble a little bit more than players who spend heavy tim eon the disabled list. Ultimately, his gamble also paid off when the Seattle Mariners signed him to a 10-year, $240 million contract.
But with all that money on the table how protected was Cano? Not only from blowing out a knee trying steal third base, but what about during a pickup basketball game at his local gym in the fall and winter? A stroke of bad luck on the hardwood at the local YMCA and $240 million gets swept off the table like it’s been hit by Hurricane Katrina.
Occasionally players will roll the dice and forego their free agency eligibility by signing a one-year “pillow contract,” often done when their last year before free agency is less than stellar.
In 2009, Seattle Mariner third baseman Adrian Beltre was looking at free agency in 2010, but his paltry statistics—eight home runs, 44 RBIs, a .265 batting average-- would have easily negated a big payday. The Mariners offered him $12 million for one year for 2010, but Beltre wanted the security of a multi-year deal, so he decided to roll the dice and sign a one year deal with the Boston red Sox at $9 million, with the intent of putting up monster stats and inking a multi=-year deal elsewhere. It was a risk. If Beltre blew out a knee for the Red Sox not only would he have settled for less money than the Mariners were offering, but his multi-year deal would have been long gone.
Beltre gambled—and won. He had a huge year for the Red Sox—44 homers, 102 RBIs, a .21 batting average—and the next year inked a 5 year/$85 million pact with the Texas Rangers. But was the gamble worth the risk? Would he have been wise to put protection in place to give him a comfortable lifestyle if the plan ended badly?
Then there’s the case of the L.A. Angels’ young star Mike Trout. Trout was drafted in 2006 and languished in the minors until early 2012 before being called up. Although he is only currently making the league rookie minimum of $512,000 per year, he is already being touted as the next $150 million player, coming off a phenomenal campaign that saw him winning Rookie of the Year and finishing second in the AL MVP vote. His career-earning potential is through the roof and he needs to have in place disability insurance to protect him and his future high-net-worth lifestyle (not his current salary of $512,000 per year), should he go down with an injury and can’t perform at a top level. This is when an athlete needs to have the financial pieces in place to maintain his lifestyle, or at least a fair portion of it. And this can only come about by realizing that with a compressed career life span and a susceptibility to career-ending injuries, that disability insurance protection is the most critical form of insurance any player can have.
If Trout suffered a serious disability today, it would cost him tens of millions by even the most conservative estimates. Sure, the Angels are contractually obligated to make good on the balance of his contract, but trout can kiss his hopes and dreams of signing a guaranteed $100M+ contract goodbye. Let’s be very, very clear here…we are talking about a professional baseball player. What disables Trout could simply be a “nuisance” to our everyday personal and professional life. What Trout needs is a specific Disability Insurance policy to protect him from right now until the date he signs a new MLB contract. At that point, he will have a guaranteed contract and the disability risk/exposure will fall to the team.
When working with professional athletes, different sports have different economics. As an advisor, your charge will be to protect the player’s interest and their future. Like any successful professional, an athlete’s greatest asset is their ability to play their sport and work in their occupation. Given the compressed career lifespan, Disability Insurance protection is the most critical form of insurance any player can own. It is important to know some basic background that will help you navigate the waters and unearth opportunity and offer reasonable advice. Below are generalizations of the characteristics unique to each sport – there are significant real life variations, so consider this a guide.
Baseball, Basketball and Hockey: MLB, NBA and NHL contracts are generally guaranteed for both death and disability risks. Disability Insurance is critical for marquee players with considerable endorsement income, and is usually purchased at maximum available levels when players are headed into free agency and expected to sign large multi year/multi-million dollar contracts. Collegiate Athletes with first or second round draft pick expectations need to secure protection against a disability that will prevent them from signing a professional contract in their intended sport.
Football: The average NFL career is three years. Most players fail to achieve similar earnings outside of the arena anytime soon after they hang up their cleats. Except for a few handfuls of truly standout players, contracts are generally NOT guaranteed, and the only real “guaranteed” money that is commonplace in the NFL is upfront “bonus money”. Advisors working with NFL players should secure disability income protection to protect their expected income. If they can’t play, they won’t get paid, so advisors and players need to be diligent purchasers of disability protection.
Golf & Tennis: There are no guarantees in golf or tennis outside of whatever might be negotiated with a sponsor. PGA and ATP Professionals ranked in the Top 100 are generally considered insurable by the underwriters in this space. Advisors working with athletes in these sports should seek as much coverage as the player’s income can support.
Let’s face it; every time an athlete steps on a field, a court, or a sheet of ice, they are one step closer to a career-ending injury. And it’s amazing to note how many advisors fail to realize that an insurance policy protecting their client against the loss of potential earnings is every bit as important in protecting their livelihood as a face mask or a batting helmet. That is until the day they are blindsided by the worst kind of bad luck. And then everything changes.
Chris Lack, Director of Business Development, Sports and Entertainment Division, of Mahwah, N.J. based Exceptional Risk Advisors, LLC, is an expert on high-limit specialty life, accident, and disability products for clients with extraordinary insurance needs. Chris’ expertise revolves around designing cutting edge insurance solutions for high profile Sports and Entertainment risks that traditional life and disability carriers are unable to deliver.
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