Use of Life Insurance to Fund the Farm Purchase from Heirs

Abstract

AbstractGeneral stochastic dominance is used to analyze the use of life insurance versus installment payments to fund the purchase of a decedent's business interest from off‐farm heirs. Generally, a risk preferrer prefers an installment purchase. The percentage of insurance funding preferred increases as aversion to risk increases. Higher income tax rates, lower discount rates, and lower premium costs move the preference for greater percentages of life insurance to lower levels of risk aversion. The funding decision clearly depends upon the characteristics of the individuals involved in the business. Nevertheless, partial funding with life insurance appears optimal in many cases.