Crop Insurance Basics

crops in rows image by david hughes from

If you are getting into the farming business for the first time, you will need to learn about crop insurance. A trained crop insurance agent is a valuable asset for you when purchasing a policy, asking questions or filing a claim. The United States Department of Agriculture's Risk Management Agency oversees the Federal Crop Insurance Corporation, which in turn provides the Multiple Peril Crop Insurance policy, the most widely used crop insurance policy in the United States.

Insurance Units

You must determine what type of unit you will use for your crop insurance policy. The unit type is a measurement of the amount of land you use, and it is used by the insurance company to determine your premium. The most common unit type is the optional unit, which essentially can be used for any amount of land as long as it is not high-risk land and all your units are in the same mapping area. An alternative is the basic unit. If you farm only one area in a county, this might be your best option because there is a 10 percent premium discount for basic unit users. Enterprise units are combinations of basic units and provide additional discounts for certain crops.

Yield Variation

Crop insurance is designed to pay the difference between your expected crop yield and the actual yield. Therefore, the variation between these two numbers dictates how much insurance coverage you need. Theoretically, if you never have any yield variation, you need no insurance, though this is never the case. A consistent yield variation minimizes any adverse financial impact on your business by helping you purchase adequate insurance without over-insuring.

Yield's Effect on Premium

Generally, if you have a high crop yield you will pay a low insurance premium. This has been a standard underwriting principle since the 1980s, when it was determined that farms with the highest yields often had the lowest loss ratios. Since that time, producers like you must prove your yields to the insurance company in order to get the maximum coverage available.

MPCI Subsidization

The Multiple Peril Crop Insurance program is highly subsidized by the federal government. Typically, the insurance program pays out more than $1 in losses for every premium dollar it takes in, and the government finances the balance. This means that chances are high that you will earn more money in claims than you pay in premiums. This provides you a sound financial incentive to purchase this policy since you may actually profit from it while being protected against losses.

Producer Responsibilities

When you purchase a Multiple Peril Crop Insurance policy, you must satisfy your responsibilities as a crop producer. As a policyholder, you are expected to report your acreage accurately, as well as your yields if you opt to do so. You must meet all policy deadlines and pay your premiums when they are due. If you suffer a loss, you must report the loss promptly. Following these steps will help you get the most out of your crop insurance policy.