Farm Credit Services of America (FCSAmerica) and Frontier Farm Credit are co-sponsoring a webinar series, Side by Side Digital. Our latest installment featured Jared Schmidt with Farm Financial Strategies, Inc. The webinar recording from June 5 is available. Explore upcoming webinars.
We invited Jared Schmidt, who is affiliated with Nationwide, to discuss life insurance in response to requests from young and beginning farmers and ranchers. Life insurance can be an important farm transition tool. It also can be difficult to sort through all the options to find the right tool for you and your family.
Schmidt outlined some basic insurance options; the list below is not meant to be comprehensive. Schmidt also provided insights for those seeking insurance to protect their family, farm and transition plan.
Selecting an Insurance Agent
While all agents must be licensed, they fall into two categories: “independent,” meaning they can sell policies from multiple insurance companies, or “captive,” selling policies for only one company. A single insurance company might have the best product for you, or you might prefer the option to compare policies from several carriers.
Agents also can develop areas of focus or specialization, including serving agricultural producers. The important thing, Schmidt said, is to find an agent with whom you are comfortable.
Among his clients, Schmidt said, one question comes up time and again: How much insurance do I need? While there is no right or wrong answer, there are two approaches, each of which helps to illustrate why you want an agent who understands your needs and goals. Some determine the appropriate coverage level based on a policyholder’s debt. Schmidt said he is in the camp that focuses on the amount needed to replace the policyholder’s income. “Farms will make money. Someone will rent them. . . So we’ve just got to get the debt reduced to the point that you can replace the income for the surviving spouse.”
Insurance for your Family, Farm and Future
Term Life Insurance
Fixed premium for a fixed period, most commonly for 15, 20 and 30 years. If you are 30 and take out a 30-year policy, your premium will be the same year after year. It also will end at age 60.
However, if you buy a convertible term policy, you can turn a term policy into a permanent policy within the allowable conversion period. The permanent policy will cost more, but if you took your policy out when you were a healthy 30-year-old, your rate at age 65 will be based on the health rating of your younger self, even if you have had cancer or some other ailment that could make you uninsurable if you were to look for a new policy.
How a Producer Might Use Term Life with a Convertible Option
To push coverage and conversion periods out as far as possible, people sometimes choose to take out a new term policy every several years, provided they can keep their premiums low as a result of youth and good health. But at some point, a policyholder might opt to exercise a conversion option.
“I only work with farmers,” Schmidt said. “Most, not all, farmers have an idea of what they are going to be doing with their farm at age 70. My kids are 35. They have probably made their decision if they’re coming back to the farm or aren’t going to. I can then decide if I still need the insurance. I can use it as a tool to pass it on to my children and say, ‘I do not need it. It served my purpose. Here, you take it. I will change the owner.’ Now a farm heir has ownership of a policy they can pay the premium on and use as a tool for a down payment when they have to buy out my assets someday.”
“All different parts of estate planning. Sometimes it fits, sometimes it does not. But that convertibility is a big deal. Having somebody experienced in that conversion with term insurance is going to be very valuable.”
Return of Premium
An assurity , this term policy costs more (Schmidt points to an option that adds $3,000 to your annual premium cost) because you get your money back. “The company effectively is paying for the cost of insurance, using the interest they make on your money while they get to hold it,’’ Schmidt said.
“Different companies will have different breaks, where maybe there is an opportunity to cancel early. Some do not. But you get a check back for that money and you can say, I did not even pay for my insurance. You lost some opportunity cost, but not some premium cost.”
Whole Life Insurance
The premium is an investment in the company issuing the policy. A whole life policy will pay dividends and the cash value will grow – all based on the issuing company's performance
How a Producer Might Use Whole Life Insurance
Whole life is going to be more expensive than a term policy. As an example, Schmidt pointed to a $1-million whole life policy with a $46,000-a-year premium taken out on a 70-year-old woman. A term policy, by comparison, might cost as little as $1,000 a year, depending on the policyholder’s age and health.
Some producers might want the discipline of investing money in a company that promises a return – a form of banking on yourself, Schmidt said. Your policy has a cash value and over time, that value gets high enough that you can borrow money from yourself, he said.
There is a fee for borrowing money and the policyholder will pay interest on the borrowed funds. But you are paying interest to yourself because it goes back into the value of the policy, Schmidt said.
As with all life insurance options, you want to spend time on calculations to determine if this offers the right financial benefit for you. Maybe you are the type of person who would do well with a lower- cost term policy, knowing you will invest in areas where you expect a good return, whether that is paying down principal on a bank loan, investing in stocks or opening a Roth IRA.
Universal Life Insurance
In the eighties, returns of whole life insurance could not keep pace with double-digit inflation, and the insurance industry saw a migration to universal life insurance, Schmidt said.
Universal life, at the time, offered more interest and, as a result, more cash value. This allowed policyholders to get more coverage for a lower premium than with whole life. But “universal life has to pay the cost of insurance every single month. You overpay premiums in the early years, and it develops a cash value. But then you are not paying enough premiums in the later years, and you watch cash value start to fall.”
If the cash value is no longer enough to cover the cost of insurance, Schmidt said, you will “hear the scariest word you can hear in life insurance, if you need life insurance. Lapsed. It is gone.” There is no cash value, no death benefit.
How a Producer Might Use Universal Life Insurance
Pay attention to two phrases with these policies – guaranteed charges and interest payments vs. current charges and interest. The former is the maximum charge the company will impose and the minimum interest it can pay; the latter is whatever the current going rate is for fees and interest payments.
“When you are working with a farm and you say, ‘I need this insurance for my down payment. I cannot risk it,’” Schmidt said. The producer might be wise to focus on the guaranteed charges. Over time, fees make the biggest difference in cash value, and by locking in the maximum allowable fee, the producer will have more certainty. The fluidity of choosing to go with current fees is more of a gamble, he advised.
Guaranteed Death Benefit Life Insurance
This is the next progression in universal life insurance and has been popular since about 2010. Producers who want to build money in their policy prefer whole life insurance. Most of his clients want a guaranteed death benefit at a lower cost, Schmidt said.
How a Producer Might Use Guaranteed Death Benefit Life Insurance
For illustrative purposes, Schmidt uses a 70-year-old man seeking $1 million in insurance coverage. The man can get a guaranteed death benefit through age 115 for $20,000 less than a whole life policy. If the guarantee aligns with his priorities, he can invest the savings on his premium in other areas of his farm. However, the man needs to pay close attention to the policy and be sure to stay current on premium payments.
Long-Term Care Benefits
There are many additional options to discuss with an agent, and long-term care benefits are among them. Relatively new, these benefits allow a policyholder to spend his/her death benefits while still alive and in need of care based on several qualifying factors.
How a Producer Might Use Long-Term Care Benefits
This is not for those planning to buy a farm with insurance as a down payment. Rather, it is something mom and dad might want to buy to help afford a nursing home without touching the farm, Schmidt said. If mom and dad never need additional care, the death benefit will be there for the heir(s).
