Curb Common Insurance Mistakes

February 6, 2011 07:31 AM
Curb Common Insurance Mistakes

Wendell Rhoades sleeps better at night knowing he’s covered. The Marion, Ohio, farmer has a proactive—and persistent—insurance agent to thank for his comfort level.

While choosing insurance coverage for his farm and family isn’t his favorite chore, Rhoades has learned how valuable it is to have an agent who insists upon a yearly review.

"For instance, there are so many different areas where we’re exposed to liability. When you have acreage scattered over several counties, you really don’t know if your landlord has any type of liability or not, and how you fall into that liability. That gets pretty confusing," Rhoades says.

The National Association of Insurance Commissioners (NAIC) says the majority of U.S. homeowners think they understand their insurance policy, but a November 2010 survey shows 86% of respondents don’t understand their liability insurance limitations. More than half don’t realize the effect credit scores have on vehicle insurance.

Not fully understanding the policy and not keeping the policy updated are two of the most common insurance mistakes that people make, says Jerry Hillard, director of farm sales for Nationwide Agribusiness Insurance Company in Des Moines, Iowa. This often leads to paying more than necessary or not realizing that coverage is inadequate until a claim is filed.

"In general, people think they should look for the cheapest premiums, but that’s not always going to give them the best coverage," Hillard says. "That’s why farmers need to sit down with their agent when [the policy] comes up for renewal. If the agent hasn’t been out to the farm in a while, the policy might not be up to date."

Rhoades farms more than 2,500 acres in and around Delaware County with his wife, Jan, and son, Ryan. He works with Allen Douce, Nationwide farm-certified agent with the Thomas Milligan Insurance Agency in Marion, to make sure the farm, rented ground and inventory (including seasonal stored chemicals, seed and crops) have the best protection for a manageable price.

Douce also manages insurance on the Rhoadeses’ hog operation.

"I usually bug them until they sit down with me. It’s too important not to do it," Douce says. Most often, the annual review captures changes in equipment owned or values impacted by commodity
prices. Douce says it is also an opportunity to update the policy based on new laws and changes in the insurance industry.

When reviewing insurance policies, experts say, farm families should pay close attention to:

  • water damage;
  • replacement cost versus actual cash value; and
  • liability.

According to NAIC, losses from earthquakes, floods, and water and sewer line breaks aren’t reimbursed under many standard policies. Farmers should talk with their agent about specific risks for water damage and make sure they have proper coverage, Hillard says.

"They may want to discuss an endorsement to provide sewer and sump pump coverage. A separate flood policy may be needed in flood-prone areas," he adds. Include in the conversation the type of reimbursement needed.

Replacement cost is the amount it takes to replace or rebuild property with materials of similar kind and quality, without deducting for depreciation. Actual cash value, on the other hand, factors in depreciation of older property.

Insuring to actual cash value often results in lower premiums, but it’s not always the best deal. If the gap between value and replacement cost is large, the farmer covers the difference if property is damaged.

However, insuring to value isn’t always less expensive, either. For instance, a farmer with a 19th-century, two-story bank barn on his property might be looking at a cost of $350,000 to rebuild that barn if it is destroyed. Most likely, the farmer would replace it with a much less expensive pole barn.

Taking a close look at the insured values of inventory is also a good idea, Douce says. With the volatility in commodity pricing during the past few years, inventory could be over- or underinsured.

"We’re catching a lot of problems with grain storage," Douce explains. "Many farms have upward of $1 million of grain in bins but have the contents insured for a fraction of that amount."

New business pursuits bring new insurance realities, too. Retail stores, farmers markets and agritourism ventures, such as hayrides, apple picking and corn mazes, need special consideration. "Most policies have exclusions for business pursuits other than crops and livestock," Hillard says. "Once you sell direct or charge a fee for a hayride, it becomes a business and you don’t have coverage."

Nothing Is for Life. Producers might be surprised by less-than-expected benefits from their life insurance policy, even if the policy is 20 or 30 years old, says Shane Bell, manager of insurance solutions for Kennedy and Coe, an accounting and consulting firm headquartered in Salina, Kan.

Bell says the policy language doesn’t change over time, but the nonguaranteed rates can fluctuate. These changes can lead to a possible reduction in death benefit or a need to increase premiums in the future to keep the policy solvent, Bell explains.

To avoid such issues, farmers should review the annual insurance statements from their life insurance agent every other year (see a checklist of items to discuss).

"Most folks pay their premium, put the policy in their lockbox and don’t think about it," Bell says. "You have to manage life insurance like it’s an asset of the farm. You don’t buy a piece of land and just let it sit there for 20 years."

When to Call an Agent

In addition to an annual review, call your insurance agent when you:

  • buy or sell equipment or buildings.
  • experience any major life changes, such as marriage, divorce or death in the immediate family.
  • seek out new income sources.

Also, download a checklist of items to discuss during a review.

Three Steps to Protecting Your Farm’s Future

  1. Look at your annual insurance statement and carefully compare from year to year. Even small annual fluctuations in the dividend amount can be a red flag. Over time, just a 0.5 change in the percentage rate can lead to a longterm loss of thousands of dollars.
  2. Ask for an in-force illustration every other year. Sit down with your agent and go over the policy in detail to make sure it still meets your needs. By reviewing the in-force illustration every other year, you will see interest fluctuate over time. The comparisons will help you decide whether you should keep or replace the policy.
  3. Manage your life insurance needs. As your debt load or family changes, make sure you increase or decrease coverage accordingly.

Life Insurance: What's Right for You?

Life insurance options are plentiful, and one size does not fit all. In fact, one size won’t even fit the same farm family throughout the years.

"It’s really about understanding all the options on the table and figuring out what you want to accomplish," says Shane Bell, manager of insurance solutions for Kennedy and Coe, an accounting and consulting firm headquartered in Salina, Kan.

Life Insurance Choices:

Term life insurance is effective for a limited period of time, generally 10 to 20 years, and is often set up to cover a specific debt that the beneficiary would have to pay if the policyholder dies, such as mortgage debt or college tuition. Premiums are much lower than those for whole or universal life insurance.

Whole life insurance provides life insurance protection as well as a cash value for the policy that can be borrowed against. After the policy has been in place for several years, the cash value might reach the point where the policyholder can use accrued money to pay his or her life insurance premium.

Universal life insurance is similar to whole life insurance, but the cash value of the policy earns interest. In this way, universal life insurance becomes an investment, not just an insurance policy.

Variable life insurance allows the policyholder to invest the cash value in a variety of separate accounts similar to mutual funds, which gives it the potential to outperform other life insurance policies and provide a bigger benefit. However, the risk is on the policyholder, rather than the life insurance company, to produce investment returns on the policy.

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