The first decision point within a crop insurance selection process is about primary policy type. Once you have selected the policy type, there are still some important decisions to make.  

The most important of these other decisions are the Coverage Level and Unit Structure which you want to utilize.  Both will significantly impact your risk potential and your per acre premiums.

Coverage Levels in crop insurance are discussed as percentages.  The base (100%) is your farm’s actual production history (APH) for Yield Protection policies or APH multiplied by the Base Price for Revenue Protection policies.

Coverage Levels can be selected in 5% increments from 50% to a maximum of 85%.  The coverage level you select will create your farm or unit specific protection level, and will also change your premiums.

Another way to think about Coverage Level is as a deductible.  The difference between your selected level and 100% is the deductible for that protection unit. For example, 75% coverage is a 25% deductible.

One way to utilize coverage level decision making is to know how large of an investment per acre you have covered through your insurance.  This is simpler to see with the Revenue Protection policies.  For Jones’ Farm, if they have cash expenses of $675/acre, they would cover all but $7 of those expenses by purchasing a 75% RP policy ($668 guarantee).  Of course, adding in the cost of insurance, they would probably have to purchase an 80% policy to fully cover costs ($712 guarantee).   

More highly leveraged farms may be required by their lender to purchase insurance coverage that equals cash outlays to ensure cash flow to meet anticipated expenses.

The last key decision made when purchasing a crop insurance policy is what unit or units of coverage do you want to employ.  Unit of coverage entails the number of fields of a given crop that are going to be within a single guarantee.   

Coverage Units can be split via both geographic and management or ownership structure.  Irrigated and non-irrigated fields of the same crop can be under separate units, as can owned and cash-rented vs. crop share-rented.   

County lines are a primary delineator, as fields must be in the same county to be within the same unit (with exceptions in very specific circumstances).

Unit Structure Example

Click on the labels in the example below to see the unit structure details for this example farm.

As you see in the example, some situations allow you to have many Optional Insurance Units, a few Basic Units, and one Enterprise Unit.  In this simplistic case, it would be very unlikely that the farm would justify the extra premiums for Optional or Basic Units compared to the Enterprise Unit.   However, as your fields get spread out across soil types, terrain, and growing conditions, the likelihood of Optional Units being the correct choice for you does increase.  Why?  The coverage you are provided is very different.  Let’s look at possible reality.

Insurance Guarantee

When talking about policy selection and coverage level selection, we talked about crop insurance covering or guaranteeing an amount per acre.  Per acre costs and guarantees are the logical way to analyze crop insurance.

However, when calculating the real guarantees that are used to be able to calculate indemnities, it is the Insurance Unit that really matters.  

For example, an Optional Unit Guarantee on a Yield Protection policy may be as follows:  35 acres corn x 170 bu APH x 75% Coverage level = 4,462.5 bushels. Your insurance policy is guaranteeing that you will harvest at least 4,462 bushels off this field, or you will receive an indemnity payment.

---

This example farm has 6 corn fields located in 3 different sections, giving Optional Units with three, two, and one field(s).  All fields are owned or cash rented.  The total bushels guaranteed is same for both Optional and Enterprise Unit (EU), but Optional has three different guarantees.  It could very easily happen that actual yield be less than the guarantee within one Section, but overall yield be greater than the EU guarantee due to better yields elsewhere.

As you’ve hopefully seen, Unit Structure and Coverage Level directly impact the Guarantees which will be in place for your fields, more specifically for the groups of fields within your chosen units.  The Guarantees form the base of potential indemnity payments if your yields and/or harvest prices are below normal.  Let’s look at this in a bit more detail.

Price Election

Before we can show indemnity calculations, there is actually one extra decision point which farms utilizing Yield Protection policies need to make.  The Price Election you select is used to calculate dollars from your bushel guarantees.  Price Election can be any 1% increment between 60% and 100% of the Base Price.  Remember that the Base Price is the February average of December corn futures or November soybean futures.  

Most farms select 100%, and a few insurance companies have buy-up policy add-ons which allow you to increase this above 100%.  For our calculations, we will assume 100% of the Base Price was elected.

Indemnity Calculations

The slides below show an example of calculating indemnity at Jones’ Farm.

Insurance Premiums

It is relatively logical that if you are receiving less protection with an insurance policy, you should be able to pay less. The table below shows the approximate premiums per acre for the Jones Farm example we just examined in detail, calculated via the FarmDoc Crop Insurance Premium Calculator Tool.

You can see that there is a very significant cost per acre difference between Enterprise Unit and Optional Unit, about $30/acre.  Thus, even though our situation had a higher indemnity payment under Optional Units, the farm would have been about $5,000 ahead to select Enterprise Unit.

Summary

You may have noticed that the higher coverage level Enterprise Units got more expensive very quickly.  There is another reason for that, other than that the dollars of protection are increasing.  That reason is the amount of subsidy percentage applied to crop insurance policy premiums. The percent of the actual premium a farm pays increases substantially above 70% coverage levels for all Units.