Farmers aren’t paying enough attention to human capital risk planning, says Hastings-based Crowe Horwath Risk Adviser Tim Ewen.
Although the intellectual property underpinning the farm’s wealth was often tied up with the owner, too little focus was placed on the “what-if?” factor, he said. In the event of a farmer becoming either temporarily or totally disabled, or passing away, planning was essential to make sure the farm business could continue to provide for family members.
“Farms rely on key people to make the business work,” said Mr Ewen. “Farmers need to take account of the human capital risk and ensure they have appropriate planning in place so the right money goes to the right people at the right time.”
Crowe Horwath cited a recent Financial Services Council survey, which found only 20 per cent of New Zealanders have income protection insurance, compared with 95 per cent who have their car and home covered. It also noted a recent Kelloggs Rural Leadership research paper by Michelle Wilson, which found that while 80 per cent of farm widows have life insurance, in hindsight only 20 per cent found it was sufficient. Meanwhile, 40 per cent said they should have had enough insurance to provide for a farm manager for 12 months. In addition, insurers typically pay out much less than is claimed.
Mr Ewen said farm owners should also be aware there could be advantages in altering their ACC structure.
“ACC will only pay 80 per cent of your pre-disability income, less tax,” he said. “And farm incomes can fluctuate markedly. In some instances the books may show little if any profit after all expenses are allocated, so it makes sense to lock-in an agreed value cover that will also cover the farmer for sickness as well as accident, regardless of how farm revenue changes.”
A related key issue is succession. Even though more than 70 per cent of farmers want to sell to their children, only 10 per cent have a succession plan in place, and access to capital is a major barrier, compounded by the high value of farms today.
Mr Ewen recommended that farmers develop a comprehensive succession plan, specifying buy-sell agreements, share purchase funding options and shareholder employment contracts. The plan should include funding for off-farm retirement needs and contingencies to cope with a major disability or premature death.
“Regular reviews are important because circumstances change,” said Mr Ewen. “They’re not a fun conversation to have, but they certainly give peace-of-mind and clarity to those involved”.