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Insurance simplified

As a rural financier and advisor I am increasingly seeing disasters as a result of insufficient life cover and insufficient risk cover being in place. We at Fraser Farm Finance have studied insurance matters but find that it is a specialist area and strongly advise all our clients to seek independent risk assessment from a suitably qualified insurance agent.

We, as farmers, have traditionally put insurance in the 'too hard basket' because we don't fully understand and more than that we don't see it as a cost to the business. We think it is a cost we can avoid but what we have failed to consider is the benefits not only for yourself and the business but to your family who may be left behind.

With the complexities and scale of many farming businesses, lenders are now insisting on proper insurance structures and adequate risk planning, particularly on the principals' lives and their health.

This is one of the best ways I have had it explained. You are sitting with a couple and I have just told one partner that they are to pretend they are dead. Now how does it all look? If you are having discussions with the surviving partner the 'dead' person wants to butt in. But in theory, they are dead, yet they still want to have their say.

Now you see how the business may look with one partner gone. You both suddenly find out how poorly you have planned, or not planned, your untimely exit from this earth. The 'dead' partner can get really irate because they are used to being in control and telling everyone what to do. In fact, once this becomes a reality, they are no longer able to be involved in the discussions and you are unable to discuss with them what is going to happen.
  • Did you say how much you loved your family?
  • Did you get round to succession planning?
  • Did you actually form that family trust?
  • Did you get your will prepared properly?
  • Did you obtain enough life insurance to cover the debt of your most untimely exit?
  • Did you have Enduring Power of Attorney?
The truth is you probably didn't.

The funeral is over, the surviving spouse is trying to balance their grief and also manage that of the children and/or siblings. They then find there is not enough money in the tin to cover funeral expenses, let alone drop the debt back on their large farming assets to make it manageable.

Successful farmers are driven and very self-reliant, so they carry a lot of information around in their head. When they go they leave a big gap behind.

Insurance may not be something that fits the brain space for us; we are too busy and we are not going to get sick, or die. Yea right!

We shouldn't treat reputable insurance agents badly and turn them away. We need to stop and consider the options they can give us.

So let's consider in simple terms what products and solutions are available and how they may work.

Death Cover

This is also called Life Insurance and Term Insurance. In short, you pay a monthly premium to an insurance company to get an agreed payment to your family or business partners upon your untimely and often premature death. This policy may also be owned by your lenders and may go towards debt reduction. Why? you may ask. It is to reduce the debt, so the farming business you have created can continue for the benefit of the surviving family. It's not about you in your lifetime, it's about getting the debt down so your family can survive in a reasonable manner.

Trauma

Also called Critical Care, Major Illness, Benefit Insurance and so on. It means a lump sum is payable upon the insured suffering a major illness or accident. For example, heart attack, stroke, cancer, kidney failure, heart surgery and 138 other conditions will allow the insurance company to pay out a lump sum.

Take the example: So you've had a stroke and all that intellect and planning is jammed in your bean can and it can't be utilised by anybody. Crudely, in business terms, you're dead. So you get paid a lump sum to reduce debt and give your family some quality of life. It can also be used for Buy/Sell Agreements for farm succession to the son/daughter who has been waiting patiently in the farm cottage to get started in the succession of your farming business.

Trauma is about a benefit paid out while you are still alive. It's not a bad option because at least you get to gain from your payment stream should anything go wrong. You see people who are terminally ill who have this type of cover suddenly doing all the things they have wanted to do in their lifetime. They are able to do these things because they receive the money from the insurance company before they died.

Income Protection

In short, this is to provide a regular income stream to replace your labour and management inputs should a temporary or permanent disability occur. Effectively your farming enterprise is still intact because whilst you are out of action there is a continuous flow of payments into your account to meet ongoing costs.

An example would include a bad back. You can't physically do the work so, in this case, but you can afford to use your insurance to pay someone to do the work for you.

In Summary

This covers the three main types of insurance cover available for farmers and business people. We need to understand the risks to ourselves, our families and to the succeeding business if we are going to ignore insurance cover. We need to consider the benefit and stop looking at the cost. We need to realise that insurance has a key place as part of our business planning and risk management strategy. More than that, it should give us better peace of mind knowing we have focused on minimising the downside risk should things go wrong.


 

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