Life insurance: defining our terms

Financial Planning: Term life. Whole life. Define your problem to choose the best plan for your farm

Life insurance often gets a bad rap. You know the stereotype: pushy salesperson trying to get you to buy something you think you don’t want or need. But for farmers and farm families, life insurance can be important for short-term needs and long-terms goals.

Let’s start with laying out the definitions: term life insurance versus whole life or permanent life insurance, what they are, and how they can be most useful to farmers.

The first thing you may need to do is get over that salesperson stereotype. “I think myths are created in farmers’ own minds based on how life insurance was sold in the past. It is still something that is sold, but I think it’s being sold now by more professional people, people who do care about farmers and their needs,” says Ken Rousselle, director, financial & estate planning services at FBC, Canada’s Farm and Small Business Tax Specialist.

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What’s the purpose?

Life insurance can play a variety of different roles in your life and your business so the first thing to consider with life insurance is its purpose: Why do you want life insurance and what outcome can it help you realize?

“I want to encourage your readers to think about purpose first,” says Jesse MacDonald, a life insurance agent with Desjardins Financial who works with farmers. “It’s all about purpose and if we can identify the purpose clearly in our own minds then it’s easier to get to what kind of insurance we want down the road.”

Some questions to ask yourself regarding purpose might be: Do I need to cover a short-term equipment loan? A mortgage? Do I want to create wealth? Do I want life insurance to be a part of my long-term succession plan so my beneficiaries can keep the farm after I pass? Do I want coverage for my final expenses?

Term life policies

There are a variety of different kinds of life insurance policies. The biggest distinction out there is term life insurance versus whole life insurance.

Term life insurance offers a temporary form of protection. For example, you might purchase term life insurance to cover debt, like a mortgage. Having term insurance means that if one or the other of a marriage or common-law partnership passes, you can use the insurance payout to pay off the mortgage or use it for another reason.

Or perhaps you have a large loan for farm equipment. You might decide to use term insurance as a way of protecting that investment. “If I was sitting with a farmer and was asked about term versus whole life insurance, my answer would be if we have a short-term problem then term is the way to go,” says Lori Claxton, a Sun Life Financial advisor based in Edmonton. It covers “a problem that is going to solve itself over time.” For example, your loan might be paid up in five years, your mortgage in 15. A term insurance plan is not something you need your whole life long.

Kris Hird, manager of life and living benefits at Alberta Motor Association (affiliated with the CAA) puts it another way. Term life insurance covers a certain set of years, however many are outlined within the policy. “Term plans are usually in sets of years and different insurance companies have different lengths of terms. The two most common term policies are 10- and 20-year policies,” he says. Term plans are usually renewable, says Hird, but the price of the policy will increase at the end of the term because the person is now 10 or 20 years older. You can, of course, choose not to renew a term policy at the end of the term, which can happen if you don’t need the insurance anymore (if, for example, the loan you were insuring is paid up). A term policy will also have an expiry age depending on the plan.

Another reason someone would get term insurance, says Hird, “is for income or financial loss to the household,” which is useful if you are the primary breadwinner and your passing would cause financial hardship to your family beyond not being able to pay the mortgage. For example, your mortgage payment might be $2,000 per month but your monthly income is $5,000. The right kind of term insurance can buffer that income loss, says Hird. Term insurance can also protect the “key person” in a farming operation. A term plan is useful in these kinds of cases because once you get to retirement age, hopefully you’ll not need income loss or key person coverage anymore; you’ll have saved for retirement and your children are not dependents anymore.

Whole life policies

When we think about whole life insurance, we are thinking about “a problem that’s going to have to be solved no matter what,” says Claxton. You have a whole life insurance for your whole life, with benefits as outlined in the particular plan you purchase.

Hird echoes this: “Whole life insurance policies, for the most part, will not expire. Whenever the insured person dies — age 60, 70, 80, 90 — the whole life insurance policy will pay out to the beneficiaries.”

They also don’t have a price change. Whole life insurance plans can be for simple things, like final burial costs, says Hird, but it can also be leaving something to beneficiaries, as an inheritance. You can leave it your kids, grandkids or to a charity or organization.

Rousselle says that whole life insurance is “the instant liquidity you’ll never get with another investment” and therefore farmers can view it “more as an investment than an expense.”

Whole life plans usually also grow in value over time, so if you buy a $50,000 whole life plan when you’re 30, it will have increased in value over time so that when it is paid out it is worth more, says Hird. “Whole life insurance can also be useful for tax and estate planning,” says Hird.

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