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Aging farmer carrying milk in barn after feeding his cows

How can you save the farm after the loss of a key person?

by John Levan | Contributor
September 14, 2020


A farmer is almost always a key person in the overall success of a farm. Without them, the entire operation could be put in immediate danger of financial failure. Key person life insurance could end up saving the farm.

What is key person insurance?

Key person insurance is life insurance that fills a specific need in a business, such as a farm. If the key person dies — the farmer, in this case — the financial consequences would be significant, maybe even devastating. Key person insurance protects the farm against the death of the person who is critical to the farm’s survival.

How does key person life insurance work?

To purchase life insurance on a key person, the business must have an insurable financial interest in the key person's life. In other words, if the key person dies, the business would face the risk of a substantial financial loss. When a business (the farm) purchases a policy, it owns it and is the beneficiary. The farmer is the “named insured” but receives no benefits from the policy.

What type of policy is used for key person life insurance?

Key person life insurance is often written on a permanent policy. The policy will have a cash value that the farm may treat as an asset. The money can be used for a variety of purposes that include buying cattle and equipment or expanding the farm. When the farmer dies, the policy provides a death benefit.

Term insurance is another option. The coverage applies for a specific period (term), usually five to 20 years. When the term expires, or the insured person dies, the insurance ends. Of course, if the death occurs before the coverage expires, the policy pays the face amount in a death benefit.

The benefits of key person insurance

Think of what would happen to a farm with the sudden loss of the farmer. Key person death benefits will allow the farm to move forward and recover from the loss. Here are the primary benefits of the cash provided to the farm:

  • Makes up for the loss of profits
  • Helps to pay off debt
  • Covers the costs to hire and train a replacement worker or several workers
  • Provides stability and peace of mind during the hard times following a death

Even if the family intends to sell the farm after the passing of the farmer, having key person insurance still makes sense. The money that the farm receives from the policy will come in handy for things like closing costs, paying off investors and severance pay for any workers.

How does a farmer determine if key person life insurance is necessary?

A farm is a business and is often dependent on the expertise of one, possibly two, individuals to succeed. If one of those people should die, the farm could likely see a drastic loss of revenue.

For example, a father and his son run a 300-acre beef farm. The father has a lifetime of experience attending auctions, knowing how and when to sell the cattle and how to treat their minor illnesses. The young and strong son does much of the physical work, directs the helpers and maintains the equipment.

Each of them fills an essential role on the farm, and the death of either one of them would leave a substantial void. If the father died, the cash from key person insurance would allow his son to hire help to take on his duties as he transitions to working “on” the business instead of “in” it. Conversely, if the son died first, the father could use the proceeds to hire replacement help.

Here are some of the general criteria for purchasing key person life insurance:

Family farmers make business decisions in front of tractors
  • If the business is highly dependent on an individual who has special skills (for instance, purchasing and selling cattle on a farm) or generates a large portion of its revenue.
  • If a business’ reputation is linked to a key person's name.
  • When the business has debt, which would be difficult or impossible to settle if a key individual died.
  • When the business is a partnership, and the partners want to be able to buy out the shares of any partner who dies.
  • If the business is looking for a loan. Banks, private equity firms and venture capitalists often refuse to sign a contract unless life insurance is in place on the company’s key individuals.

How much insurance does a farmer need, and what will it cost?

It isn’t easy to determine the value of a key person in terms of dollars. All you can do is try to minimize the impact of losing that person. Start by looking at what the individual does and try to come up with an amount that would cover the loss.

In the case of the farmer in our example, try to think about how many years it will take the son to pick up the experience the father already has. That would include things like buying and selling livestock, negotiating feed prices, deciding on the best equipment for the farm and a host of other skills he learned along the way. Consider the amount of revenue the farmer is generating each month and multiply that by the number of months it might take the son to be close to his father's level of expertise.

Not only will the son be filling new shoes, but whoever takes on the son's former duties will require training. How long will that take? Trying to arrive at a dollar amount is no more than an educated guess, but whatever is decided must also be added to the amount of key person insurance.

If the son is part of the key person insurance plan, use the same strategy to determine the amount of his coverage. Some insurers will provide formulas to help calculate the value of a key person.

As for cost, the premiums for key person life insurance will depend on the age, health and sex of the insured individual and the size and type of business. The type of insurance you choose, along with the policy limits, will also factor into the cost.

Farmers are perfect candidates for key person life insurance

One of the main requirements for a key person insurance policy is that the individual plays an essential role in the business. The person must have substantial responsibilities or special skills that contribute to profits. Anyone who knows a farmer and sees what he does will agree that those requirements read like a job description for a farmer.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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