Life insurance can be a financial planning tool that helps ensure the family farm is passed on to the next generation. The agents at Hometown Insurance can help you find the right policy with the right coverage for your family farm’s needs. The expenses associated with a farm create a unique financial situation for farmers. Establishing a proper life insurance policy plan can be a resource that ensures farm expenses are covered and that the next generation of farmers can continue the family business.
Types of Life Insurance
Life insurance can be defined as either term or permanent insurance. Term life insurance establishes a fixed period and a fixed rate for coverage. This type of policy provides a specific amount of coverage at an agreed upon value, but only during the policy’s defined term limits. Permanent life insurance (sometimes called whole life insurance), by comparison, is a cumulative policy that has no defined term. It accumulates a cash value in addition to the death benefit.
Which Policy Is Right?
Term insurance is invariably cheaper than whole insurance. Premiums paid toward term insurance do not accumulate and are not returned to the purchaser at any point in the future. Should the policyholder die during the term of the policy, a defined death benefit is paid to the beneficiary. Whole insurance costs more than term insurance, but it also provides greater coverage. It is like a term insurance policy with an additional savings plan built into it. One benefit of whole insurance is that this savings element can be borrowed against or taken out if the policy is terminated. It can also be used to provide an annuity to aging parents in a farming family. The right policy will depend on your farm’s needs and what you can afford.
Regardless of which plan you choose, the coverage for your life insurance plan should sufficiently cover final expenses, such as funeral costs, and additional expenses associated with the legal transition of the farm. The benefit coverage should also take into consideration any outstanding debts owed by the farm that would be inherited by the next generation.
Farm Expenses
Final expenses of a farm can be a significant burden on survivors. Life insurance can minimize that financial hardship. The expenses for a farm include estate taxes, estate settlement costs, any outstanding debts owed by the farm, and any associated legal fees required for the transition of the farm. If multiple heirs are involved, life insurance can be used to buy out other heirs, if this is the family’s wish. In a situation where there are multiple heirs, but only one is needed to continue the operation of the farm, life insurance can provide a fair settlement of economic value among all heirs. These details can be worked out in advance with wills and estate planning.
Who Should Own the Policy?
The life insurance policy can be purchased by the policyholder, the beneficiary, or a farming partner. It is often more beneficial for someone to take out a life insurance policy for another person, or to have the policy transferred to another person. It may be easier for the survivor to file a claim if the survivor holds the policy. A life insurance policy can be purchased in one’s own name and gifted or transferred to a beneficiary. Such a gift provides financial security for the next generation. A potential survivor may also take out a life insurance policy on the current farm owner. In an instance where a whole life policy is established early on, a beneficiary can use the policy’s savings portion as replacement income for aging parents.
It is not recommended to establish a whole insurance policy on a person already in poor health, as these policies are cumulative. The longer this policy is available, the greater the benefit or savings. An established life insurance policy provides a financially smooth transition from one generation to the next. Farming partners who have vested interests in the farm can also take out life insurance policies for their partners. This establishes financial security to cover them if their partner’s passing leaves the farm unable to meet its business obligation. It also provides the funds to buy out the partner farm if necessary. Families should consider this possibility when planning the farm estate, as they may be potential buyers invested in their family farm.
Establishing Beneficiaries
Listing the proper beneficiaries of a life insurance policy ensures the policy’s death benefit is accessible to those who will use it to cover the farm’s expenses. Naming the right beneficiaries is an important step in making sure the farm stays in the family and is not bought out by a competitor or partner. It also ensures the farm’s proper heir is the person who can access the benefit and cover the farm’s expenses.
Final Thoughts
Farming is often a family business. It is a business of labour and often love. Farms are important to the families running them. Life insurance can be used as an estate planning tool to ensure your family farm stays in the family, where it belongs. Making sure your family farm stays financially sound through a transition from one generation to the next will mean your family does not have to sell the farm to competitors, and your farm can be loved and enjoyed for generations to come.
Our Hometown Life Insurance team of licensed professionals has the experience and expertise to assist you in planning for your family farm as part of your legacy. Each family has unique goals for the future of their farm or business and it is important to enroll the assistance of an expert. Our team provides complimentary planning services – there is no cost to meeting with us to review, but a great value in understanding how you can ensure that your farm will stay in your family for the next generation. Contact our team to get started – we are happy to answer any questions you may have and set you on the path to continued success and tradition with your family farm staying in the family.
