Life Insurance and Debt

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In a recent webcast series, I surveyed the producer participants regarding life insurance. I asked the producers whether they had enough life insurance to cover their outstanding debts and I received some interesting results.

Overall, 61% of the participants stated that their life insurance would cover all debt.  Another 36% stated that they were not fully covered, while 3% were in the process of becoming fully insured.

Let’s discuss this management issue more fully.  One participant responded that insurance was not affordable.  Yes, pre-existing health conditions and age can skyrocket premiums.  Another responded that he was a young producer in a growing business and the extra premiums would be a burden on cash flow to service his debt.  Even in these situations mentioned, life insurance is still a prudent risk-management tool for producers with financial leverage.

Numerous widows who have attended my seminars over the years can attest to the importance of life insurance.  One widow was burdened with $500,000 of debt and insufficient equity after deferred taxes – i.e. capital gains, federa, and state taxes – were paid.  She has struggled to keep the farm profitable despite high commodity prices in the grain sector. 

Life insurance is not only for men. One individual at a recent meeting discussed that after the untimely death of his wife, he has found that it is a real financial burden to care for his four children and manage the farm. To make matters worse, he has over $1 million of farm debt to service. 

While I am not a life insurance salesman, the importance of this risk-management tool is critical if one is carrying financial leverage. In addition to insurance agencies, some lenders offer life insurance products.  It is so easy to procrastinate on this risk management variable. Please do not get caught in the trap.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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