Professional athletes often find themselves in a unique financial situation, with substantial earnings over a relatively short career span. While their high incomes can provide financial security in the near term, the challenge lies in managing and preserving that wealth for the long term, especially after retirement. One often overlooked solution for future income is a private placement variable annuity (PPVA).
The Money
If they are fortunate enough, a professional athlete will have one significant contract which pays off in a relatively short number of years – usually between a single payment and as many as ten years. Then, in addition to their salaries, athletes often earn additional money from endorsements and other applications of their celebrity. For instance, it is estimated that Michael Jordan earned $350 million in salary and $2.3 billion in endorsements and other related ventures.
In a current example, the Los Angeles Lakers awarded Anthony Davis a three-year contract extension worth $177.1 million which starts in the 2025-26 season. Davis made $40.6 million last season and will make $43.2 million this season before his new deal begins. In addition, Davis’s endorsements are said to be worth $10 million a year. However, at age 30, there is a good probability that this level of income will have mostly dissipated by the time Davis is 40.
Long-term income planning becomes necessary with considerations for investing for the period after the ‘big money’ stops and for what is likely to be the second half of his or her life. For this earlier period, professional money management into taxable investments is common. This can range from relatively liquid investments into alternatives with lock-in period that make funds available to the athlete when they are needed.
The Long-term
One savings tool that is prevalent with professional athletes is life insurance. The ability to structure a cash value policy so that tax-free loans and withdrawals can be accessed later is attractive. There is also an income tax-free death benefit should there be an early death. Unfortunately, life insurance can be problematic.
“I cannot tell you the number of athletes who have come to me over the years to tell me how they had tapped their life insurance policies too soon and were facing a huge tax liability from a lapsed policy,” says Jerry W. Hester, II, the Chairman & CEO of Verve International Insurance, Ltd., a life insurance company specializing in PPVA solutions. “In addition, many teams purchase key person life insurance policies on athletes, and this eats aways at the available capacity. This means that even if an athlete wanted to purchase a life insurance policy as a savings tool, they may not be able to purchase one that is big enough for what they are trying to accomplish.”
For these reasons, a PPVA policy often makes sense as the vehicle that professional athletes can use to save an unlimited amount of money for their later years.
What is a PPVA?
A PPVA is a type of investment contract that combines the features of a traditional annuity with the flexibility and investment options of a variable annuity. Unlike traditional annuities, which are typically offered to the general public, PPVAs are designed for accredited investors, including high-net-worth individuals like professional athletes.
Among the key features and benefits are:
Tax Advantages: PPVAs offer tax-deferred growth on earnings, meaning athletes can invest their income without immediately paying taxes on the gains. This tax-deferral feature is especially beneficial for high-income earners who are looking to maximize their savings.
Investment Flexibility: PPVAs allow athletes to choose from a variety of investment options, including stocks, bonds, mutual funds and alternative investments, based on their risk tolerance and financial goals. This flexibility enables athletes to choose their own investment manager to tailor their investment strategy to suit their individual needs and preferences.
Asset Protection: PPVAs offer a level of asset protection from creditors and lawsuits, making them an attractive option for athletes concerned about safeguarding their wealth. Depending upon where they live, by structuring their assets within a PPVA, athletes can shield their savings from potential legal liabilities.
Estate Planning Benefits: PPVAs can be an effective estate planning tool, allowing athletes to designate beneficiaries and potentially bypass probate proceedings. By carefully planning their PPVA strategy, athletes can ensure their wealth is efficiently transferred to their heirs according to their wishes.
Hester, a former professional basketball player, regularly works with athletes and their management in structuring PPVA solutions. “It is important to remember that if an annuity is touched before age 59 ½, there is a federal tax penalty of 10%. This can cause those looking to tap into a PPVA early to change their minds. Also, since the portion of an annuity payment that is attributed to a gain in value is taxable, recipients are taxed as they go and do not have to worry about a huge tax bill that can occur when lapsing a policy with loans.”
An Athlete’s Personal Team
While PPVAs offer investment flexibility, it's essential for athletes to carefully assess their risk tolerance and diversify their portfolio accordingly. Working with a financial advisor experienced in working with athletes can help ensure their investment strategy aligns with their long-term goals and risk tolerance is key. With their tax advantages, investment flexibility, asset protection features, and estate planning benefits, PPVAs offer athletes a strategic way to preserve and grow their earnings to support their lifestyles for the rest of their lives.
At Life Insurance Strategies Group, we do not sell products. We help our individual and institutional clients make decisions involving complex life insurance transactions.