The two basic types of life insurance are term and whole life insurance. Which one is right for you might depend on whether you just want to provide for your family, or also want to provide for yourself.
Jim Perch, director of marketing for Missouri Farm Bureau Insurance, said whole life is also at times called “Permanent Insurance.”
With whole life, “People pay a premium; a portion of that premium builds in terms of cash value for the insured,” Perch told Ozarks Farm & Neighbor. “Those kinds of policies may pay what is called a dividend; that’s basically a return of unused premium to the policy holder. A person will typically keep a whole life policy for their working career, and at the end they will have money to show for it.”
“Whole life is typically a combination of an insurance policy and a savings plan,” added Dan Childs, an economist and senior agricultural consultant with the Ardmore, Okla.-based Samuel R. Nobel Foundation. “An individual is paying an insurance company to force them to save money. In a whole life policy at age 65, they would project the value of this policy to be some amount that you could receive, and have a nice-sized nest egg for your retirement years that you could draw on.”
And if something happens to the policyholder until then, it’s still insurance and pays out the face value of the policy to the beneficiary.
Term insurance is cheaper, but it lasts for a specified period of time and when that ends, if you’re still alive, the policy expires. Perch said depending on how it’s written, the policy may decrease in value over time; for instance, if it’s written to protect a mortgage, the amount of insurance decreases as the remaining amount owed on the principle decreases.
So which is better?
“If life insurance is really what they need, term life insurance is all you’re paying for. ‘I want this much coverage, for this length of time,’ and that’s what term life insurance will provide you,” Childs said.
When it comes to how much coverage you need, Childs said the first thing to look at is the size of your mortgage; a term life policy should be worth that much at a minimum. The second consideration should be the age of the family.
“There may be a young spouse or younger children,” he said, “and in the absence of the breadwinner, rather than to throw the surviving spouse into the job market and the rigors of providing for and raising a young family, you could say we want the family to have a certain amount per year for at least ten years. You would amortize that and say, what amount does the insurance need to be to provide for that stream of revenue, assuming a certain percentage of return? So, the stage of life of the insured might impact the amount of insurance that they would choose to buy.”
If there is not a family to provide for and no heirs want to continue the farm or ranching operation, perhaps you don’t need life insurance after all; they can simply liquidate the asset and divide that. On the other hand, if you want to provide the heirs an inheritance, the question becomes whether the value of the asset is enough to pay off the mortgage.
“Most lenders don’t like to loan 100 percent; the Farm Credit System likes to be at 80 percent or less. In that case, if the manager or owner passed and the heirs sold the asset – if it had some equity left in it – there would be very little need for any life insurance,” Childs said.
