Motorbikes and barns are replaceable but how would you replace your income if you could no longer produce one?

23 August 2021

Ensuring your farm has adequate risk insurance cover means asking some hard questions. While most farmers have their motorbikes, barns and other infrastructure covered, many fail to consider income protection insurance to protect their ability to generate income.

Weighing up your risks and identifying insurance needs depends on how your farm operates, who does what on the farm and how income is generated (breeding, finishing, trading, crops, dairy). You’ll also need to consider your debt levels, farm size, profitability, and succession planning requirements.

For example, a smaller farming operation might require a debt reduction via insurance to ensure it can fund a manager if the surviving spouse is to stay on farm. A larger farming operation might be able to sustain the loss of a key person or owner short-term and instead require a farm consultant to ensure the business is moving forward in a profitable way.

Key person cover

Key person cover can help protect the farm owner or a key person in the business, so that little or no financial pressure is placed on the business in the event of injury or illness. But when it comes to risk insurance, one size doesn’t fit all.

Farmers require bespoke risk plans to meet their human capital risk requirements. And a bespoke risk plan can only be implemented after you’ve had a thorough discussion on the needs and outcomes required for all people involved.

Sometimes these conversations can be challenging given the subject matter. However, once the ideas have been put on the table and a plan put in place, clients are left with peace of mind and comfort knowing they have the safety net in place to take care of their family and the farming business should a significant and catastrophic event occur.

Choosing a risk insurance policy

With a vast range of risk insurance options available from various insurance companies, it’s a good idea to review your risk insurance requirements with a qualified risk adviser, who can cut through the jargon to help you understand the policy’s features and benefits and how they will help when needed. They should also be able to recommend the best fit for your circumstances and budget.

Policy wording is important - the stronger the policy wording is, the more likelihood there is of claims acceptance. A clear understanding of the ownership of the policies is also vitally important. It is the “owner” of the policy who receives the funds from a policy pay out – not the surviving spouse or family member. So, to ensure the funds go the correct person or entity, make sure correct ownership of the policies is documented.

Risk insurance policies should be reviewed annually, but at least every two years. This is especially important if there have been any significant changes, such as to the farm ownership, debt levels or personnel.

Finally, when deciding on an insurance policy, changes in circumstances for individuals and family groups need to be considered. As a general rule, if it lacks flexibility there could be a cost factor involved.

ACC - Prevention. Care. Recovery.

When reviewing your risk insurances, it’s a good idea to review ACC at the same time.

If your farming businesses has a Trust for its farm ownership and trading entity, you might receive a trustee distribution as the preferred option of receiving payment for your work. If this is the case, you may not be paying any ACC levies personally, but it means you won’t receive any weekly compensation from ACC to replace income should you have an accident. That can put severe financial pressure on the farming business and the family – and you won’t know this is the case until you need it.

A review of ACC covers could also highlight an opportunity to ‘dial down’ ACC cover and potentially reduce the amount of ACC levies you pay providing you have the appropriate risk planning in place.

Risk insurance is an important part of successful and sustainable farming operations. For assistance with establishing or reviewing your income protection policy, contact our risk insurance experts today.