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Life Insurance Funding of Buy-Sell Arrangements in Small Businesses

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  • Tauer, Loren W.

Abstract

Buy-sell arrangements for the death of a co-owner may be funded with life insurance. The mechanisms and details of buy-sell arrangements were discussed. The decision whether to use life insurance was modeled using the expected utility theorem. State dependent utility was used since a surviving partner may become more (or less) risk averse upon the death of a co-owner. Life insurance funding is preferred at relatively low amounts of risk aversion, especially if the surviving partner becomes more risk averse after the co-owner's death. A lower percentage of life insurance would be used if insurance premiums are significantly above actuarially fair premiums. Given currently available insurance rates, most closely held small businesses probably should fund their buy-sell arrangements with life insurance.

Suggested Citation

  • Tauer, Loren W., 1999. "Life Insurance Funding of Buy-Sell Arrangements in Small Businesses," Working Papers 14733, Cornell University, Department of Applied Economics and Management.
    • Handle: RePEc:ags:cudawp:14733
    DOI: 10.22004/ag.econ.14733
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    File URL: https://ageconsearch.umn.edu/record/14733/files/wp9928.pdf
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    References listed on IDEAS

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    1. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    2. Philip J. Cook & Daniel A. Graham, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 91(1), pages 143-156.
    3. Palsson, Anne-Marie, 1996. "Does the degree of relative risk aversion vary with household characteristics?," Journal of Economic Psychology, Elsevier, vol. 17(6), pages 771-787, December.
    4. John S. Hammond, III, 1974. "Simplifying the Choice between Uncertain Prospects Where Preference is Nonlinear," Management Science, INFORMS, vol. 20(7), pages 1047-1072, March.
    5. Loren W. Tauer, 1985. "Use of Life Insurance to Fund the Farm Purchase from Heirs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(1), pages 60-69.
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    Cited by:

    1. McCarl, Bruce A., 1988. "Preference Among Risky Prospects Under Constant Risk Aversion," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 20(2), pages 1-10, December.

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