Whether you depend on your crops for your entire livelihood, a large portion of your income, or even just to feed your own family, losing a year’s worth of crops could lead to serious financial hardship. Crop insurance helps to replace the income you lose when you lose your crop yield.
What is Crop Insurance?
Crop insurance is a special type of insurance that’s specifically for the crops that you grow. Unlike a farm insurance policy or other policy, crop insurance protects the plants in your field rather than your buildings, tools, or other hard assets. Crop insurance covers a wide range of perils depending on the options that you choose.
What Types of Crop Insurance Are There?
There are three common types of crop insurance.
Multiple Peril Crop Insurance (MPCI)
Multiple peril crop insurance is a federally-backed insurance policy that you purchase through authorized private insurers. The federal backing guarantees coverage even during widespread disasters and the private insurers handle issuing policies, reviewing claims, and other administrative tasks.
MPCI policies generally protect crop destruction or loss of yield due to natural disasters. This may include drought, freezing, and diseases. Some policies allow farmers to add coverage for low yields not caused by disaster or for market price changes.
Any farmer is eligible to participate as long as you purchase coverage before planting your crops. You can buy insurance coverage from one of the authorized insurers through your insurance agent.
Crop-Hail Insurance
Crop-hail insurance is a private insurance option. The primary purpose of crop-hail insurance is to protect against hail damage.
Hail can completely destroy one section of crops but leave other sections untouched. This could lead to a large financial loss that still falls below MPCI deductibles. Since crop-hail insurance generally has no deductible, it can also be an inexpensive way of covering your MPCI deductible even if paying that deductible wouldn’t be a major hardship.
Many crop-hail insurance policies also include coverage for other perils such as lightning, fire, wind, and vandalism. You can generally choose your coverage options, limits, and deductibles to match your financial needs, risk tolerance, and overlapping MPCI insurance.
Crop Revenue Insurance
Crop revenue insurance is another private insurance option. It protects you when your revenues fall due to either low yields or prices falling. The main difference between this and an MPCI or crop-hail policy is that crop revenue insurance protects against non-disaster perils. Keep in mind that your MPCI or crop-hail policy may offer this as a built-in or optional add-on, so you may not need crop revenue insurance as a separate policy.
How Are Crop Insurance Rates Determined?
The United States Department of Agriculture Risk Management Agency sets rates for MPCI policies based on the type of crop and region. Private insurers set their own rates for crop-hail policies using factors such as location, crop type, and other risks. You will also need to report your acreage since larger crops will need more insurance.
How Much Will Crop Insurance Pay You?
Like other insurance policies, the first step is checking whether the reason for your loss is covered under your insurance policy. Next, the loss will have to be higher than your insurance deductible for you to be able to file a claim.
The value of your crops is calculated based on the difference between your historical yield in normal years and the lowered (or zero) yield in the year the disaster happens. Most policies require the loss to be above a certain percentage of your typical yield and pay a certain percentage of the market price for the lost yield. You can select both of these percentages when you buy your policy with higher percentages leading to a higher premium.
What Happens if You Don’t Buy Crop Insurance?
Whether to buy crop insurance is a simple math problem. Think about your recurring expenses, the cost to plant this year’s crop, and the cost to clean up the destroyed crops. Would you be able to meet these expenses with no revenue? What if it happened two years in a row?
In addition, you should consider any contracts you’ve signed to sell your crops. Would you be liable for damages if you weren’t able to deliver as promised?
Doesn’t the IRS Give a Tax Break if You Lose Your Crops?
The tax code generally does allow you to write off your losses and use them to offset your taxes in either the current or future years. Like other deductions, you generally end up saving a percentage of your loss equal to your income tax rate rather than getting a tax break for the entire loss.
What if Crop Insurance Isn’t Available?
The USDA doesn’t offer MPCI policies for all crops in all locations. This may be because the location is less than ideal for a specific crop or because there aren’t enough farms in the area to support an actuarially sound insurance offering.
Even when you can’t get MPCI coverage, you can almost always find a private insurance policy. If you can’t find a private insurance policy at a reasonable cost, you may wish to reconsider if you’re taking on too much risk by planting that crop at that location.
Work With Your Insurance Agent
Your insurance agent can help you evaluate your insurance needs, obtain federal insurance, and fill in the gaps with private insurance. Contact us now for a quote or more information.
