A good strategy for managing financial burdens that can result from one’s death is never a bad idea.
Life insurance is one tool for farmers to consider.
It might not always be necessary, but it is prudent to consider the types of life insurance and how they might help plan for the future, particularly if an estate contains a business or significant assets.
Most family farms will roll over to the next generation on a tax deferred basis, but this is not always the case.
A tax deferred rollover may not be applicable if the next generation is a non-resident or does not meet the Canada Revenue Agency’s definition of a child.
In these circumstances, farmers can be left with significant tax bills.
A life insurance policy might significantly reduce such burdens in certain circumstances.
There are several types of life insurance policies:
- Term insurance — This is the simplest type of life insurance. The premiums are fixed for a specific number of years. The term of the insurance depends on how long the policy is needed and can be for any specified number of years that is required. The policy carries no value and cannot be borrowed against or paid out if cancelled.
- Term to 100 — Like term insurance, this has no cash value. The difference is that the premium is set for life and will not increase. This may mean higher premiums in the early years of the policy when compared to term insurance, but it will likely be cheaper in the latter years. The policy doesn’t charge premiums once an individual reaches the age of 100, but the policy is still in place.
- Whole life (universal life) — Whole life insurance is different in that part of the premiums are paid into an investment account, which can then be built up over time. This increase in value is called the cash surrender value. The cash surrender value within the policy is paid to the insurance holder if the policy is cancelled. The policy holder has to pay a minimum premium to hold the policy and can pay up to a maximum. The investments are usually mutual funds.
- Joint policies — cover more than one individual and can be cheaper than having individual policies. They can be set up as “first to die” or “last to die.” Under the first to die version, as soon as one of the covered individuals dies the policy pays out to the surviving policy holder or other named beneficiary. Under the last to die version, the policy pays out upon the death of the surviving policy holder. The money can help with the estate issues such as covering taxes on capital gains and equalizing the inheritance among several children.
There are many situations where life insurance may be appropriate: to ease the transfer of business to future generations, protect the business for key personnel or deal with the death of shareholders.
It is also a way to ensure that there is money for children’s education and a spouse isn’t left with financial burdens in the case of an unexpected death.
Life insurance policies can be a useful tool when one child wants to farm and the other does not because it ensures both children are treated fairly and equal.
Speaking with a professional about whether a life insurance policy would be appropriate for your situation could be the difference between success or distress in the future of the farm.