By: Gary J. Heim, Esq.
Some farmers have purchased whole life insurance as an integral part of their estate/farm succession plan. Frequently, the children who are not actively involved in the family farm business (non-farming children) are the intended recipients of those insurance proceeds. In the parents’ quest to be fair and equitable among the children, the insurance proceeds often pass to the non-farming children to eliminate or reduce the payments that the farming children would otherwise make for the family farm assets they are receiving. Some of our clients, who have purchased whole life insurance as part of their farm succession plan, however, are discovering, unexpectedly, that their insurance may lapse before their deaths, whether automatically or due to unaffordable premium increases. If the policy lapses, there are fewer assets to distribute at their deaths. In the most extreme cases, there are no assets to distribute to the non-farming children.
People expect term insurance (no cash value) to lapse at a certain age. On the other hand, whole life insurance (any insurance with a cash value such as universal, variable or traditional whole life) is commonly expected to continue until the insured dies… regardless of the age. But this is a common misconception.
Just as longer life expectancies and reduced investment and interest returns have wreaked havoc in the pension world, these same factors have adversely impacted some (not all) whole life policies. The most vulnerable policies are those purchased before 2008 when higher investment and interest returns were the norm.
An estate/farm succession plan should be reviewed every five (5) years to evaluate changes in farm/business circumstances, tax laws, Medicaid qualification and assets/debts. Part of that review should include an insurance company-generated report that projects when the policy will expire under current premium and cash value levels. The report, commonly referred to as an “in-force illustration,” can be requested from the agent or directly from the issuing company.
If you learn from the report that your policy is projected to expire at a certain age, you can determine whether changes to your estate/farm succession plan are necessary, so all of your children are treated fairly. The attorneys at Mette, Evans & Woodside are available to counsel and assist you with updates to your estate/farm succession plan, including the interplay of the life insurance component of that plan.