Reduce risk with loan insurance

Loan insurance is an important risk management tool that can allow farms to carry on after a tragic event.

A disability or untimely death to key farm personnel can adversely affect that operation’s ability to generate the cash flow needed to meet its debt obligations, but loan insurance can mitigate that risk, says Terry Betker president and CEO of Backswath Management.

Liquidity and continuity

“The need for liquidity at the time of an unexpected death is the primary reason most farm business owners choose to insure themselves with creditor or personally owned life insurance,” says Pete Aarssen, president of Maple Creek Partners.

Another motivation is business continuity.

It's important that farm successors, usually adult children, have available cash to continue business operations and are unaffected by possible changes to loan conditions or terms, often in the name of the long-time principal farm operator, Aarssen explains.

Heightened interest

There's heightened interest in loan insurance, a product of larger loans, to reflect significantly higher land and asset values, says Betker.

"It is entirely common, almost required, to carry millions of dollars of debt in order to meet the farm business plans for the typical farm enterprise today," Aarssen says.

Loan insurance policies assist by taking into account retraining, adapting and replacing in the event of accident or death, adds André Fagnou, director, pricing and products at Farm Credit Canada.

In a worst-case scenario - loss of life - the amount of a policy could be applied to a loan, and could even completely pay down the loan or significantly reduce it, depending on the coverage, Fagnou says.

Any institution offering financing commonly has an option for life insurance on that loan, Fagnou says.

He says it’s a very competitive market with numerous providers, including FCC.

Features

Fagnou recommends farmers understand the features and benefits of a program because all are not equal.

One common feature to look for is whether the amount of the premium decreases with the outstanding principle balance of the loan, Betker says.

A potential drawback is that some creditors might still require the assignment of real property as collateral to a loan, notes Aarssen. A lender forcing the liquidation of a piece of property to repay a loan could thereby jeopardize the future of the farm, he says.

"In a competitive market, just like when purchasing a car or a needed piece of equipment, one should seek out the advice and counsel of a few qualified advisors," Aarssen says.

Bottom line

Loan insurance can save a farm from sinking under debt in the event of accident or death, but not all programs are equal. In today’s competitive market, research and explore options to understand the features and benefits of loan insurance before investing.

Article by: Richard Kamchen