Disability, life and long-term care insurance provide reassurance
Farmers are quick to protect against the risks that could jeopardize their bottom line, but few think about the consequences if something happens to them. In the event of an accident, could your farm survive?
Securing his farm’s future is top of mind for Iowa farmer Chris Barron. To guarantee that happens, he makes sure more than one employee is competent enough to keep the various aspects of the operation going should those in management suffer an injury or even worse.
"I don’t want to be the only one who knows how to do what I do," Barron says of the farm’s record-keeping procedures.
Most people assume they are invincible, but leaving a legacy requires strategic, big-picture planning—and preparing for the worst, explains Farm Journal succession expert Kevin Spafford. Employing a capable workforce and protecting the financial side of the operation with adequate insurance are keys to longevity.
Spafford recommends that farm families consider purchasing three types of insurance: disability, life and long-term care.
Disability insurance. An important piece of a farm’s financial security plan is ensuring that needs are met if the breadwinner is injured and cannot work.
"Farmers are often surprised by an initial price quote for disability insurance," Spafford says. "They should weigh the cost of coverage against the probability of loss and the support necessary to maintain the family’s financial security."
When searching for the policy that is right for you, Spafford emphasizes, it is important to know how much money it takes to support your family. To calculate your pretax income needs, add your required monthly income to any other additional needs (bills that aren’t monthly but have a real cost, such as taxes, car maintenance, etc.).
To determine your income during disability, add together your disability insurance benefits, your salary, your spouse’s salary, investment income and any other income.
To calculate monthly coverage excess or deficiency, subtract your total pretax income needs from your income during disability. Once your needs are calculated, seek coverage from an insurance provider.
Life insurance. A death can jeopardize financial well-being and the future of the farm. That’s where life insurance comes into play—it is designed to provide money when it is needed the most.
According to a study by the Life Insurance Marketing and Research Association, more than 6 million households in America do not have a life insurance policy. As a result, 22% will have immediate trouble with daily expenses if the primary wage earner dies, and 26% will be able to meet financial needs for only a few months.
To determine how much life insurance coverage is necessary, consider these five key areas:
1. Final expenses. How much money will your family need to resolve things after you pass,
including funeral and medical expenses? Are there outstanding debts that your loved ones will have to pay? Are there special needs or educational funds that need to be considered?
2. Income replacement. If the sole wage earner passes, how much money will be required to meet the family’s basic needs? Spafford says there are two ways to calculate this figure. The first method is to assume a monthly income need. Multiply that amount by 12 and then divide the result by an assumed investment rate of return to determine necessary income replacement. With the second method, take the monthly need, multiply it by 12 and then again by a set number of years.
3. Overhead expenses. If the primary operator dies, how much money will be needed to ensure that all overhead costs are met to keep the business running? This is generally set up like an income replacement fund, Spafford says, but it is used only for a specific number of years.
4. Estate tax and transfer obligations. When compared with historical figures, today’s estate tax rates and exclusion limits are lower. With the current exclusion at $5 million and a 35% tax rate, a couple with a $20 million farm each receives a $5 million exclusion, so only $10 million is subject to tax. At a tax rate of 35%, that’s $3.5 million in taxes.
5. Administrative expenses. Who will manage your estate when you pass? Generally, probate fees are involved while your estate is being settled. Include that amount in your life insurance policy. Spafford says this figure is generally calculated as a percentage of the gross estate. In the previous example, $20 million times a 7% probate fee means $1.4 million is needed to settle the estate.
Long-term care insurance. Today, long-term care insurance can cover alternative care facilities, home health care and adult day care. As a result, it has become a valuable piece of a family’s succession plan.
"We do long-term care analysis for every family during the succession planning process," Spafford says. "We recommend coverage when appropriate, discuss alternatives to cover the cost and help families understand the ramifications of a long-term care need."
Brigitte Franzen, an adviser with Water Street Solutions, agrees that it’s important to plan for long-term care needs. "Farmers think, ‘I’ve always been healthy, it’s not going to happen to me,’" she says. "If we’re young and healthy, it’s easy to assume it will stay that way."
As with any insurance, it’s crucial that the coverage reflect reality. Consider the types of care the policy covers, what events trigger benefits and whether the policy requires a hospital stay prior to providing benefits for a long-term facility.
Spafford suggests calculating your local cost of care to ensure ample coverage. Check to see if
the policy has inflation protection, a guaranteed insurability rider and is renewable. Talk to your provider about what coverage is right for you.
Calculate Your Necessary Coverage
Use these formulas to calculate your insurance needs. Consult your insurance agent before purchasing policies.
Monthly income need + additional needs – spouse’s salary + income from investments + other income = necessary amount of coverage
Final expenses + income replacement + overhead expenses + estate tax and transfer obligations + administrative expenses = necessary amount of coverage
Long-Term Care Insurance
Average care cost in your area ÷ 12 months = necessary amount of money per month to cover costs