College football insurance policies are big -- but complex -- business

Clemson QB Deshaun Watson now has $10 million worth of insurance on his football career. Streeter Lecka / Getty Images

Sources revealed Wednesday that Clemson's Deshaun Watson has taken out two insurance policies against a career-ending injury: a $5 million total disability policy and a $5 million loss of value policy.

The reality is, players rarely end up receiving a payout, even after they've sustained an injury. And when they do get paid, it's still unclear whether the IRS has dibs on a cut of the money.

Here's a primer on how these policies work:

What is a total disability policy?

It protects a player should he become unable to play football again because of an injury. This covers an injury on or off the field, usually from the time a player signs the policy until the following football season. The only reason something wouldn't be covered is if there's a pre-existing injury; the insurer might specify in the policy that the player would not be covered if the same injury occurs again.

A player can attempt to come back from an injury and still collect, but in general, policies won't pay out if he's able to play in more than four games following the injury.

A player can't just decide that he can't play. A doctor, sometimes one from the player's side and one from the insurer's side, must agree that is the case.

What is a loss of value policy?

It is an attachment to the disability policy. It projects where a player is supposed to go in the draft and then provides for a payment up to a specific amount, should the player fall in the draft order because of an injury.

A player can get paid a small amount if he doesn't slip far, or the whole amount, as Ifo Ekpre-Olomu received when he was projected to be a first-round pick and an injury caused him to slip to the seventh round. Someone who didn't collect in this year's draft was Myles Jack, who fell to the 36th overall pick, but only would have started to collect money at Pick 45.

The loss of value must be associated with an injury. There's no coverage for falling in the draft due to other issues.

What do these policies cost?

A rule of thumb is about $10,000 for every $1 million in coverage. Previously, the NCAA helped secure a loan for the premium, which would be paid by the player's family, but a couple of years ago, that changed when it was discovered that schools were allowed to take out the policies themselves.

Sources said that Clemson took out a policy for Watson through International Specialty Insurance, which has established itself as the leader in the space, especially when it comes to offering loss of value.

How often do players collect?

Not too often on total disability. It has happened only a handful of times in the past 15 years. Loss of value collection has occurred more often. Players who have collected over the years include Ekpre-Olomu and Jaylon Smith, who will collect a lump sum of $900,000 after slipping in this year's draft.

In March 2015, USC wide receiver Marqise Lee sued his insurer, Lloyd's of London, when he slipped in the 2014 draft, claiming he was owed $4.5 million. But Lloyd's argued that at the time he signed his policy, Lee had an injury that he didn't disclose. The two sides agreed to settle the case for an undisclosed amount this May.

And in case you're wondering, when there is a payout, all of the money goes to the player. None of it goes to the school.

When a player collects, is it tax free?

When a player pays for a premium up front or takes out a loan to pay it, it is tax free. When the school pays for the premium, it's not yet clear. The IRS hasn't formally ruled on whether taxes have to be taken out of the lump sum collected because the player didn't pay for the premium to begin with.

Why do schools pay?

This is now a good way for a school to keep a player who might be scared to return. In other words, the school is saying, if you hurt yourself, we've got your back.