Is life insurance a good estate planning tool for farm families?

ST. PAUL, Minn. – Life insurance can be an excellent tool when transferring the farm to the next generation.
Life insurance can provide needed funds for farming heirs to use if they must purchase the farm upon the death of the parents.
This is particularly important when there is more than one heir, there is one farming heir, and the farm is willed to all heirs in equal shares.
There are two major categories of life insurance. They are term insurance and whole life insurance.
Term insurance. Term insurance is purchased on an annual basis and usually increases in cost as the insured gets older. You pay a year’s premium for a year’s coverage.
This is much like auto, fire or wind insurance.
The entire premium payment goes into the insurance coverage and there is no cash value accumulation – again, one year’s premium for one year’s coverage.
The policy pays out at death assuming the premium is paid and the policy is kept in force until the death of the insured.
Whole life. Whole life insurance is different from term insurance in that it includes an accompanying savings, investment or cash value accumulation plan.
The cash value accumulation builds as the policy gains in age.
You can borrow against this value at some point in time.
Premium payments are higher than term insurance because of the cash value feature.
There are many types of whole life insurance, so check with your insurance agent to determine which is best for your situation.
Functions. Life insurance can be used for many functions within an estate plan.
Life insurance can provide funds that can be willed to non-farm heirs allowing the farm assets to transfer to the farming heir.
The farming heir can purchase life insurance on his/her parents. Upon their death, the farming heir has funds with which to buy out the non-farm heirs.
Ownership. Note, there is a critical factor here that must be taken into account.
Ownership of the insurance policy is very important.
The farming heir must own the policy and make the premium payments. The insured should be the farming parent or parents. The beneficiary should be the farming heir.
If the parents want to gift back the premium payments to the farming heir, they can do so.
However, there must be a paper trail, so the farming heir must make the premium payment from his/her checking account to show ownership.
The parents must then show a similar transaction when gifting back the value of the insurance premium.
Following this simple process can assure the farming heir will be able to continue the farm operation.
Things to consider. There are some key factors in deciding how and when to use life insurance in an estate and transfer plan, as well as how much insurance to purchase.
They involve affordability, age, insurability, size and composition of family and estate, projected risk and family needs.
Carefully analyze these factors before getting involved in purchasing life insurance.
As always, if you have questions about the process, contact your attorney, accountant, insurance agent and other professionals for help.
(Gary Hachfeld is an ag business management specialist with the University of Minnesota Extension Service Regional Center, Mankato.)