Uses of life insurance for agricultural families
April 28, 2017
Life insurance can serve multiple purposes for an agricultural family. Some of these uses are:
1. Income replacement
2. Estate equalization
3. Estate tax liquidity
4. Buy-sell agreement funding
5. Wealth replacement for a CRT
The most common use of life insurance is to provide money for a family to live on in the event of a breadwinner's death. A rule of thumb is to purchase five to 10 years annual income of the breadwinner.
Life insurance is often purchased as a means to equalize inheritance among on and off-farm children. A common dilemma among agricultural families is how to be fair to their children who are not inheriting the family ranch.
Because the wealth of many agricultural families is mostly comprised of their land and other business assets, with insufficient other assets to provide a fair inheritance, life insurance is often purchased on mom and dad with the off-farm children as beneficiaries.
ESTATE TAX LIQUIDATION
Estate taxes are due nine months after death. Since most families don't have excessive cash lying around to pay these taxes and because they don't want their children to be forced into selling property or borrowing money to pay estate taxes, life insurance is often purchased to provide cash for paying this tax. If life insurance is purchased for estate tax liquidity, it is critically important that the parents not possess any "incidents of ownership" in the life insurance policy. If they do, the proceeds will be included in their estate and subject to estate taxes. An irrevocable life insurance trust is often set up to keep the proceeds out of the insured's estate.
FUNDING OF BUY-SELL AGREEMENTS
Agreements are often established to buy out siblings or other farm/ranch partners. Life insurance is often purchased to have cash available for a buy-out in the event of one of the owner's death.
WEALTH PLACEMENT FOR A CHARITABLE REMAINDER TRUST
A charitable remainder trust can be used to bypass tax on the sale of ranch property. Since the money remaining in the charitable remainder trust upon the parent's death passes to charity and not their children, parent's will often purchase life insurance as a way to replace the wealth in the trust for their children.
How Much Insurance Should I Buy?
Determining the amount of life insurance to purchase is an important decision and depends on many factors. It is best to speak with an experienced life insurance agent to help you determine the amount. Online financial calculators can be helpful tools for helping you estimate an amount of life insurance to purchase.
What Type of Life Insurance Should I Purchase?
There are many different types of life insurance but they all boil down to two main types, term insurance and permanent or cash value insurance. Some needs are best served by term insurance but other needs such as estate planning and wealth replacement may be better served with permanent insurance.
— Nolt is the author of the book; Financial Strategies for Selling a Farm or Ranch and the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement.