Why I would gladly pay millions for disability insurance…

…if I were a star professional athlete, that is.

Okay, so the title is a bit of a stretch and dream. But I wanted to make a point that too often we complain about the cost of insurance without considering the benefits. Yes, paying millions for insurance would be expensive, but in certain situations it would make sense.

A recent story illustrates the case in point. It was reported that college quarterback Colt McCoy took out an insurance policy between $3 to $5 million in the case of a career ending injury.

The policy provides a great hedge for McCoy. If McCoy does get injured, he has a safety net with a respectable payout. If McCoy doesn’t get injured, then he’s expected to be drafted in the NFL and his millions in earnings could repay the cost of the premium.

This is more or less the sentiment that his father, Brad McCoy, stated to reporters: “The premium is astronomical…But the payback in the event of a catastrophe puts the monetary value there. We felt it was the prudent thing to do.” [via ESPN]

The moral of this story is perhaps we should view or own insurance decisions in this light. Yes, health/life/disability insurance can be expensive, but the paybacks in catastrophe often make them the prudent thing to do.

I am reminded of a passage from Nassim Nicholas Taleb in Fooled by Randomness: “it does not matter how frequently something succeeds if failure is too costly to bear.”

Speculation: how much is Colt McCoy paying?

This is tangential, but the reports did leave me with a burning question: just how astronomical is McCoy’s premium anyway?

I couldn’t find anything specific, so I’m going to take some liberty to create a very rough estimate from the single data point I found. This information is from an article on on the Sadler Sports and Recreation Insurance website, “Disability Market Tightens for Sports Superstars.”

The only data I could find is about baseball. In 2006, the Houston Astros were denied a claim of $15.6 million for injured first baseman Jeff Bagwell. And according to ESPN, the Astros paid about $2.4 million in premium.

If I got the numbers and insurance policy right, then that’s about a 15 percent premium rate. Applying that rate to Colt McCoy’s $3 to $5 million policy would mean a premium somewhere between $450,000 and $750,000.

Of course, one would expect the rates to be different for football versus baseball, for college versus professional, and for a young kid versus a veteran player. But even at a premium rate of 1 percent the policy would translate to a cost of $30,000 and $50,000. Astronomical indeed!