Life Insurance Funding of Buy-Sell Arrangements in Small Businesses

Loren W. Tauer

No 14733, Working Papers from Cornell University, Department of Applied Economics and Management

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.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Pages: 14
Date: 1999
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:cudawp:14733

DOI: 10.22004/ag.econ.14733

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