I covered this topic 10 years ago and since then, farm land in central Alberta has tripled in value and our farming population is aging. This has created a pressing need to consider the financial risks now involved with farming on top of the input costs, the weather, pests, disease, low returns, etc.
Managing risk down on the farm: Due to last year’s extreme weather and continued commodity and cattle price variability, many central Alberta farm families have had to refinance, work off the farm or set up other businesses to stay afloat and provide cash flow. These can add financial risks, highlighting the need to find ways to cover these risks in an economical manner.
Risk of refinancing: Farmers looking for loans or operating lines of credit are usually required to have adequate life insurance as a condition of the loan. Premiums increase with age and poor health. Creditor type plans are both expensive and poor value for the money. If the health of the insured deteriorates they are no longer insurable. This is a huge issue if you need to refinance. Personally or corporately owned plans may be a better option, and can be designed in such a way to allow future flexibility, such as tax sheltering, guaranteed future insurance additional pension income, or to conserve final estate values for the next generation.
Risk of becoming sick or disabled: Many family farms operate around a key person, their spouse or a farm manager. Anyone sidelined by sickness or disability for an extended period of time can seriously impact the viability of the farm. Disability coverage can provide income for the sick or injured person, or pay for someone to replace them. Critical illness plans provide a large tax-free lump sum on diagnosis of a covered condition such as heart attack, stroke or cancer. These plans can be structured to provide return of all premiums after a specific time period without claims, or on death. Some have the option to be converted to plans that provide long term care such as full time nursing or facility care.
Risks with working off the farm: One way to reduce the liability risks of working off farm is to incorporate the off-farm business to keep it separate from the farm business. For example, if the off-farm business is oil patch related and it has purchased land or machinery used by the farm, there is potentially a direct line for creditors of the oilfield business to the farm assets in the event of a civil law suit. Conversely, any litigation against the farm could impact the viability of the oilfield business.
Increasing farm size, increasing risk: As farm size increases so do the risks. As much as we may dislike the cost of insurance, few could recover financially from not having adequate coverage in place. Having a properly designed risk management strategy is essential to protect family farm assets accumulated over a lifetime. This strategy can also be used to tax shelter proceeds of a sale or rollover of the farm, help transfer the estate intact to the next generation, provide additional retirement income or can be a cost effective way to equalize the estate as a way to compensate non farming children.
If you want to know more about how to cover your farm’s financial risks, or how to plan your retirement or equalize your estate, book an appointment and sit down with your financial advisor.
Image licensed through Shutterstock