Sunday, April 11, 2010

Keeping the Family Farm in the Family

I hope to keep my family's farm in my family, so I recently have been much more attune to happenings in agriculture. I have especially been reading online since learning that a couple of my friends (Jeff Caldwell, the husband of one of my wife's co-workers, and Mike McGinnis, a guy who went to my high school and was a wrestling, football and tennis team mate) do a lot of writing on the subject. An article Jeff posted this week, Have The Talk, was especially relevant to me both personally and professionally. You can read it here.

"Consecutive ownership within the same family for 100 years or more of at least 40 acres of the original holding of Iowa farmland" is the eligibility guideline to be considered a Century Farm according to the Iowa Department of Agriculture. Many family farms fail to reach this milestone because the family fails to "have the talk" about passing the ownership from one generation to the next. Jeff's article helps get that ball rolling. As with any business succession, people often worry about problems that might arise and use that as an excuse to not discuss it, but the potential problems are minute compared the the real problems caused by lack of a plan when a business owner dies or has an unexpected health crisis. When no plan exists, often the business or farm has to be sold to someone outside the family.

Life insurance shows its incredible power when used properly as a tool to facilitate transferring ownership of a farm. It can solve a lot of "what ifs".

What if Dad and/or Mom dies unexpectedly and the next generation is too young to take over? The death benefit can be used to keep the farm running with hired help or to replace lost income while a renter farms the land until the kids are ready to take it over.

What if only one of several children wants the farm? How can the estate be settled fairly? If "the talk" reveals this situation, life insurance can help form a fair solution. Without life insurance, at the time of death it's not unusual for the ones who don't want the farm to demand that it be sold so they can get their shares of the estate. Unless the one who wants it has the capital available to buy it, the farm often ends up being bought by someone outside the family. If the one who wants the farm buys a life insurance policy on the owner, he or she would have the money to buy out siblings at the time of death, and it's fair because he or she has invested his or her own money into the life insurance. Depending on the situation (which should be discussed with a qualified tax advisor), the premiums could potentially be considered a business expense. Another benefit of this route is that depending on the type of policy, etc., the cash value in the life insurance could be used to purchase of the farm before the owner's death if wanted.

What if multiple children want the farm? How can the estate be settled fairly then? This is a much tougher question, one that just having a life insurance policy won't cure. One person using the strategy above would have the upper hand since the money would give him or her a lot of bargaining power, but that scenario would lead to a lot of bickering. This is the scenario where "the talk" is going to be most difficult, but also will do the most to prevent future problems.

What if the owner(s) become sick or disabled and/or have to go into a nursing home? On the surface, it doesn't sound like this is a job for life insurance. The best option to cover this possibility would be a separate disability and/or long term care policies, but sometimes the best option isn't possible. The right life insurance policy can do double or triple duty if the added cost of a second or third insurance policy isn't affordable or if age or a health issue makes it impossible to qualify for coverage. Many life insurance policies have more lenient underwriting than long term care or disability coverage because the life insurance is more predictable. The amount of "death benefit" they pay out for terminally ill or disabled policyholders before their death is a defined amount, not an ambiguous number based on how long someone is unable to work. The money paid out could help pay for the cost and/or buy the farm before the owner "buys the farm".
Here are some "real number" examples of how life insurance could be used as part of the transfer of ownership plan.
Young farmer (25)with middle-aged parent (50--this is middle-age in my book since I'm not there yet): To purchase $250,000 coverage, assuming Dad is a standard rating, the cheap route to go would be term insurance, which would cost around $1,000 a year (conservative estimate--could be lower depending on health) for a 20 year policy. Then Dad would be 70 and son would be 45, where there's a good chance the son would be taking over anyway. For about three times that premium cost, he could buy a return of premium plan, where it would pay the same death benefit, but at the end if Dad was still alive, he could get back everything he'd paid in, about $60,000, which could be used as part of the money needed to buy him out. Or for about $3,000 per year he could buy permanent insurance guaranteed until Dad was 120 (and Son is 95). There are also numerous other possibilities depending on wants and needs, policies that would pay for long term care, would build large amounts of cash value, etc.
Middle-aged child (50) with older parent (70): Believe it or not, there are 20 year term policies available on healthy 70 year-olds. A standard rated male could get $250,000 coverage for about $8,000 a year, guaranteed for 20 years. The downside is that if he lives past 90 the rates jump quickly and before long the premium paid over the years will be more than the $250,000 death benefit. A permanent policy would be a much better option here, with only a slightly higher premium.

These are just a few of the ways life insurance can be used to keep the family farm in the family. It all starts with a family discussion, but once that is done, make sure you include your life insurance agent (along with a tax advisor and attorney as the bare minimum professional team).

Sunday, March 14, 2010

Wellmark Evil Ripoff?

Because of all the attention being paid to Congress's proposed health care reform, the 18% increase in Wellmark's individual health insurance premiums is getting more attention than it normally would. Is it a big increase? Absolutely. Is it going to hurt? Of course it is. And the final question: why is health insurance expensive? Because it's worth it.

Here's a little background. Effective October 1, 2008, Wellmark revamped its rates and underwriting guidelines. Before that, I wrote very little individual health insurance coverage with Wellmark because of their underwriting. If an applicant had ever been sick or hurt, it seemed like they always wanted to see doctor records, and usually added riders to exclude anything an applicant had ever been treated for in the past. I often had applicants turn down what was offered and take their chances without insurance. Sometimes applicants were turned down for ridiculous reasons. For example, one lady couldn't recall who the doctor was 20 years earlier who had treated her for a minor ankle fracture over 20 years earlier when she lived on the other side of the country. She said he was old enough then that after 20 years he was almost certainly either retired or dead. Because we were not able to get his records regarding her old ankle injury, she was declined for coverage, even though she hadn't required any further treatment since having the cast removed 6 weeks after the accident happened.

When Wellmark revamped its underwriting, I was suddenly able to write business with them because they were being reasonable. For many of the health questions they changed from asking, "Have you EVER" to "In the last five years have you..." or "In the last two years..." or "Are you currently...". Instead of excluding high blood pressure, they figured it into the rates, charging slightly more to the person who showed a history of it being well controlled and charging a lot more for the person who was not controlling it well. In my eyes, it was very fair, and most applicants saw it that way too.

Since October 2008 I have used Wellmark almost exclusively for individual health insurance because they have been easy to work with and have usually had a rate lower than the competition. Even with the increased rates, I will continue to offer Wellmark because I have not been able to find anything better.

The situation with American Community illustrates better than anything else why Wellmark must raise rates. For the past year and a half, when I compared them to Wellmark, they occasionally had lower rates for similar but not equal coverage. When Wellmark announced these rate changes tried to take another look at American Community rates, but I discovered that they are no longer offering individual health insurance in Iowa and A.M. Best dropped their rating to "D" ("poor").

I have been and will continue to check into other companies, but have yet to find anyone who is offering rates significantly lower than the new higher rates than Wellmark's increased rates.

Are the new higher rates an evil ripoff? I don't think so, since the increases are more bringing the rates in line with other companies than anything else. I think what happened is that Wellmark mis-calculated the effect of loosening up their underwriting guidelines and has had to adjust the rates accordingly. Wellmark has postponed the increase pending an investigation from the governor's office. I'll be updating here, but I'll be shocked if the state finds the increases are not justified.