Many risks lurk outside the farm gate and the first instinct of farmers might be to think they have no control over these, but they would be under-selling themselves with this approach.

There is no half way house when it comes to obtaining top advice and farming couples must ensure they receive the best advice in every aspect of their business. Poor business advice is likely to be expensive and will continue to be expensive – couples must get right on top of this issue.

So what else outside of the farm gate do farmers have some control over?

Often it's right in front of them and they only have to look at their many suppliers and the timing and mix of that supply. They have the choice, in some cases, to contract that supply in advance and build up strong personal, business and marketing arrangements with somebody or an organisation of their choice.

The ability to build up a business relationship involving integrity and trust is something else within their control and they can negotiate an immediate down payment or deposit.

The best way to manage business risk is to put together sound and sustainable bankable net farm profits. The best Plan B is to at least balance their incoming and outgoing cash flow. And the best Plan C is to minimise their farming loss.

The main breadwinner on a farm always dies prematurely and it's you. So you need to have a will that needs to be up to date. Don't delay on this. A significant amount of life insurance in place needs to be held - probably owned by your existing family trust.

How much life insurance is needed is a good question and the answer will be different from farming family to farming family but given this variation here's the rule of thumb:

- Firstly, $1 million is needed to make a hole in a mortgage which may enable your spouse and children to remain in the homestead if they want to and allow the farm to be managed or leased. Housing could be an issue with this option.

- Secondly, $500,000 to enable a spouse to buy a home off the farm.

- Thirdly, $500,000 to cover the children’s primary, secondary and tertiary education costs.

- Fourthly, $500,000 to invest and provide some income for a spouse particularly when children are still at home.

These four premiums amount to a total life cover of $2.5m. An absolute minimum of probably $1.5m is required if the farm was going to be sold.

Let's say you are a 35-year-old non-smoker in reasonable health. Without complicating this with the different types of life cover, a $2.5m Pure Term policy would cost you around $1650 a year. This type of policy would involve an annual premium increase and has no asset or investment as surrender value. The premium for $1.5m would be about $1020 a year.

It's fair comment that your spouse should also probably have at least $500,000 of the same type of cover in place – often affordability comes up in these sort of decisions and when this applies then the bulk of the annual premium needs to be over the life of the main breadwinner.

With the current farming volatility, the cost of the main breadwinner being incapacitated for perhaps 10 weeks at a key point in their farming career can set them back physically, mentally and financially. Financially, some income protection insurance will have a place particularly over those early key farming years. After this period perhaps reduce the cover or maybe terminate it.

This form of insurance is relatively expensive – probably $1000 or an absolute minimum of $800 per week – and even then there will be a four week period of no receipt with most of these policies. At $800 a week and with no other unusual health issues, this might cost someone a premium of about $1560 a year. This could be income tax deductible which probably reduces its real term cost by about $360 to $1200 a year.

With all of these potential risks you need to plan for the worst but manage for the best.

Another risk management tool is your ACC Cover. For farming, probably Cover Plus Extra is the best option. A sheep and beef farmer on coverage of $65,000 would be looking at a premium cost in the order of $3300.

When it comes to life or income protection insurance the cost of smoking is getting prohibitive.

Make sure farm buildings are insured to the maximum sum assured value. About every two years you will need to discuss the specific covers again with your insurer. Within probably three to four years New Zealand is going to have a lot of dwellings that are under-insured because the full insurance replacement option no longer exists as an insurance option.

A marriage falling over is probably your biggest single business risk. This cannot be insured against and take it from this writer that cash, flowers and chocolates will not cut it. Time, thought and genuine interest will get closer to reducing this risk.

Student loans in New Zealand now total $12 billion and are still rising. I am not against an individual loan of $20,000 to $25,000, but once they start getting much above this level they are starting to risk a slowdown in their educational and business career. My advice is for farming parents to get involved from the outset.

Your family's health is another risk area. Family health insurance covering all medical and surgery costs and including three children until they are 21 years old would have an annual current cost of about $1800-$2600 a year depending upon a few issues. Once the children are 21 years old they could take over their portion of the policy.

New Zealand health costs are increasing at a rate of about 17 per cent a year on a compounding basis. If this continues then health and insurer policy premium costs are going to double every 4.2 years. Eventually they will be out of sight financially and the public hospital waiting lists are going to be long.

After working out their insurance needs couples often find the cost of not dying is the most expensive option.

This writer is not in any way retained by the insurance industry, but has taken up some of their offerings. In some ways insurance payments are like betting on a racehorse that you hope does not win.

Pita Alexander is a specialist farm accountant at Alexanders.

7 October 2015