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2010.05.19

Insurance has become a critical consideration (and expense) for individuals and business today. With a convergence of factors including but not limited to increased litigation, greater risk exposure (whether perceived or genuine), broader income earning potential and heightened competition amongst policy providers, the need to identify, understand and implement the proper types of insurance coverage with the appropriate parties is critical: particularly for a higher-profile client such as a professional sports athlete, for example.

Disability insurance is a key form of insurance for persons of all types of employment and income levels, but one that receives particular interest with regard to professional athletes. And it is also often misunderstood, overlooked and/or poorly implemented. This topic is particularly timely in light of the recent surprise announcement of Red Bull Racing driver Brian Vickers’ medical diagnosis involving blood clots, which unfortunately prevented him from competing in the Sprint Cup Series race at Dover last weekend, as well as the upcoming Sprint All-Star race at Charlotte, while his medical team continues to work on diagnosis and resolution of his ailment. This is the first time in his entire racing career dating back to go-kart competition in the mid-1990’s that he has missed a race. For disclosure purposes, I should note that Vickers is a friend and former business associate; I had the pleasure of serving as his business manager for the duration of his racing career until we amicably parted ways to pursue different opportunities in 2008

While insurance policies can be created and structured in virtually unlimited ways, there are some basic industry-accepted benchmarks for disability insurance; for illustrative purposes, I’ll use a NASCAR driver as an example. NASCAR driver contracts deem them “independent contractors” for legal and financial purposes, which basically means that they are a 3rd party individual and/or entity agreeing to render services on behalf of that team. The distinction is important for many reasons, including that the driver is not covered by policies or benefits available to wage (W2) employees of the team. So the driver is responsible for independently procuring whatever forms of insurance he/she needs (medical, worker’s comp, life, disability, etc…), as well as any other benefits required to manage their personal welfare and assets, such as financial/retirement vehicles.

For years, many drivers did not secure disability insurance for a variety of reasons, such as expense, lack of options or familiarity, or even poor counsel from others. There have been numerous high-profile examples of gaffes involving the risk management of drivers and in the early years of NASCAR and professional auto racing, when drivers statistically had a higher likelihood of being injured at some point in their career, this was a major area of concern for the welfare of the driver and his dependents. A life insurance policy is uniquely different and only provides coverage (payment) if they lose their life. But what if a Sprint Cup driver earning $10 million per year, with significant personal and professional financial liabilities (employees, businesses, multiple homes and other personal expenses, aircraft, motor coaches, etc…) suddenly becomes injured, cannot render their driving services to the team(s) they are contracted to and then loses that income? Even a few months of income interruption can have significant negative impact, particularly if that individual is highly leveraged in their income to debt ratio.

I have personally always employed a business management strategy with clients that stresses comprehensive and aggressive insurance coverage, with routine reviews to ensure the client’s needs have not changed in manner that goes beyond our coverage. Any effective financial manager will agree that every dollar counts and working to ensure you have the right level of insurance at an appropriate net expense is critical. And some people simply don’t embrace the notion of insurance or want to pay the expense for something they statistically may never need. But with 20 years in the motor sports industry, I’ve been amazed at observing some drivers who earns millions of dollars a year and voluntarily choose to minimize or altogether avoid securing an appropriate disability policy, simply because of that relative expense. When drivers in the early years struggled to make a decent living and remain healthy being racers, it’s hard to feel sorry for a modern-day driver paid millions of dollars who just doesn’t prioritize managing their risk and long-term welfare.

So how much does a disability policy cost a NASCAR driver? There are multiple factors involved, including but not limited to: underwriter of policy, length of policy, terms/conditions of policy, age of driver, series they compete in, previous medical/injury history, income and non-racing risk factors, such as how often they fly commercially vs. private, do they engage in higher-risk activities such as skydiving or moto cross, etc…? It’s a complex process whereby the underwriter assesses multiple factors using formulas to generate a corresponding fee that will go into their combined risk pool, allowing them to properly cover and pay claims and depending on the nature of the underwriter, also generate profit. But ultimately the key factor affecting the premiums is the amount of financial coverage the client desires, relative to their documented income with the policy underwriter. If you have a top Sprint Cup driver earning $5-10+ million per year and they want or need both temporary and permanent disability coverage to supplement most, if not all, of their income level, the annual expense of such a policy can easily exceed $100k per year! And while that is more than most American households earn annually, you have to put that into perspective relative to the income potential of a professional athlete.

As a business manager, I would consider at least two major exceptions where a client can possibly avoid the need/expense of either a TTD and/or PTD policy. If they have a very strong positive balance of assets versus short/long-term liabilities (in layman’s terms, if the driver properly manages their expenditures and has access to sufficient savings which can supplant the income received from a disability policy), then there may not be a need for either or both forms of disability policies. The other exception may be where the contract negotiated between the driver and the team includes certain terms for guaranteed income, including in the event of a temporary disability. I have written and negotiated such terms in client contracts and this has both objective and subjective benefits; first, it is of value in a driver’s contract because it directly affects the level of TTD and PTD disability insurance policy needs the client may have, and second, on a subjective level it provides a measure of security and loyalty between the parties. Ironically, when such terms are in an athlete’s contract, the athlete may also agree in the contract to facilitate the team’s ability to secure their own disability policy on their driver, if they so choose, in order to mitigate their financial risk in the event of their driver becoming injured but continuing to receive income for a predetermined amount of time.

Finally, an absolutely critical but sometimes mismanaged aspect of such policies is that if a client has another party (employer or contracting party) paying for a disability policy, the effect is that any policy payments will be treated as taxable income (the general IRS benchmark is whether such an expense is paid with pre or post-tax income). When a client is in the 40% effective tax bracket, this has a material impact on the determination of the insurance coverage necessary and in most cases, it is advantageous to actually pay the premium yourself. In the case of a NASCAR driver, this can be as simple as identifying a policy premium, negotiating for the team to be responsible for this expense as part of the terms, BUT simply having the team compensate the driver for that amount of money rather than them actually securing and paying for the policy on behalf of the driver. In my case history with clients requiring these types of policies, I’ve always preferred to work with the most reputable and experienced companies offering these types of policies, such as Lloyd’s of London for athlete or other unique clients, or Northwestern Mutual for general business and individual policy needs.

The disability coverage is typically separated into two categories - TTD or “temporary total disability,” and PTD or “permanent total disability” that are designed to work independently but in conjunction with each other. The TTD policy typically provides a fixed amount of short-term benefits (income) payable to the beneficiary upon a qualifying event and related conditions. For example, most TTD policies have a 15-30 day exclusion period, meaning that from the official date of documentation of the injury, the client must wait a certain period before the TTD policy takes effect and provides benefit. Some policies may provide the option of minimizing such a period, but the premium expense increases correspondingly and these policies are generally not designed for very short disabilities. So if a driver is suddenly diagnosed with a condition that his/her doctors will not approve them driving a racecar, the date of that initial diagnosis becomes the effective date. If the driver is subsequently able to drive within 30 days and that is a term in the policy, there is no payout. If the injury exceeds that initial delay period, then the TTD policy officially takes effect and benefits begin being paid to the beneficiary with a term limit of perhaps 12 months.

A PTD policy is different in that it usually provides a lump-sum payout after an extended period of time, typically at least 12 months or longer. So if a driver client owns both a TTD and PTD policy, becomes injured and cannot drive his/her racecar for 6 months, the TTD policy would only apply. If they suffered an injury that materially prevented them from performing their services to the team for over a year, for example, from the date of initial injury, the TTD policy would initially take effect and upon its expiration of benefits term, the PTD policy would apply. A PTD policy is designed primarily for one need – to provide a significant lump-sum payment that the beneficiary can rely on for long-term financial security in the event that they suffer an injury that either materially affects their ability to perform at their previous level and/or compete altogether. Developing disability policy terms for a NASCAR driver, for example, is a bit less complicated than say an NFL player since they can suffer so many different types of injuries that can impede or end their career, the likelihood of such an injury is much higher and their average potential career is shorter. For example, the NFL Players Association claims the average duration of a player’s career is just 3.5 years! The most common type of injury/disability for a NASCAR driver that would involve a TTD claim is a head-injury, particularly closed head trauma. Applicable examples in the modern era would include Ernie Ervan or Jerry Nadeau. Both of these gentlemen suffered severe head injuries that required protracted medical treatment and even if a beneficiary can return to a reasonably “normal” way of life after such an injury, they may continue to suffer sufficient disability in that they may not ever be able to be cleared by doctors to drive a racecar again, or even more subjectively, they receive medical clearance but simply have diminished capabilities and/or no team is interested in hiring them.

The topic of medical-related insurance, and particularly disability and life insurance, can often be a difficult topic to discuss with a client, family member or loved one. Racecar drivers and other athletes can be highly superstitious and prefer to avoid the subject altogether. But in reality, it is no different than writing a will and a key part of effective management and preservation of a client’s best personal and professional interests is reviewing and addressing any applicable needs properly.

It is also important to summarize the topic of disability insurance by reiterating that it does NOT apply solely to NASCAR or other racecar drivers, celebrities and/or wealthy individuals. Disability insurance is available to most parties interested in weighing the merit of TTD and/or PTD coverage. If you have dependents or other persons supported thru your ability to generate income in a chosen profession, disability insurance should at least be a consideration. In recent years, some employers have offered certain forms of disability insurance to their employees, usually in the form of an elective or voluntary benefit, but you should always be aware of such options and compare them with your advisors to independent policy options. The key considerations include: understanding the basic nature of what disability insurance entails, identifying your own specific needs and aligning yourself with experienced, accredited and reputable representatives (manager/agent/underwriter). When a healthy, 26 year-old NASCAR champion suddenly faces a break in his routine, it should provide pause for us all. Get well Brian!

- Posted by: Eric Giangiordano -

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