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Investment in Human Capital, Diversification, and Life Insurance Needs of a Small Businessperson

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  • Hambdi Bilici
  • P. James Stickels

Abstract

A small business or professional practice is a "partially-marketable" investment. Its owner invests not only marketable assets such as cash, equipment, and licenses in the business, but also his or her human capital. The combined assets, employed effectively, generate investment returns which determine the value of the firm. Human capital, however, is non-separable from the owner, so it is non-marketable. This makes the business only partially-marketable. If the human capital contribution is removed, through death or incapacity of the owner, the firm loses value. A life insurance policy, in he amount of the value created by the owner’s human capital contribution to the firm, is an important component of the owner ‘s investment portfolio.

Suggested Citation

  • Hambdi Bilici & P. James Stickels, 1988. "Investment in Human Capital, Diversification, and Life Insurance Needs of a Small Businessperson," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 11(2), pages 55-67.
    • Handle: RePEc:wri:journl:v:11:y:1988:i:2:p:55-67
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