The Cascading Life Insurance Strategy

If you are a grandparent wishing to provide an asset for your grandchildren without compromising your own financial security, you may want to consider an estate planning application known as Cascading Life Insurance.


A Lifetime Gift for Your Grandchildren


How does the Cascading Life Insurance Strategy work?

  • The grandparent would purchase an insurance policy on his or her grandchild and funds the policy to create significant cash value; 

  • The grandparent would own the policy and name the parent of the grandchild as contingent owner and primary beneficiary;

  • The cost of life insurance is lowest at younger ages, maximizing the tax deferred growth of the cash value in the policy.

What are the benefits of the Cascading Life Insurance Strategy? 

  • Tax deferred or tax free accumulation of wealth;

  • Generational transfer of wealth with no income tax consequences;

  • Avoids probate fees;

  • Protection against claims of creditors;

  • Provides a significant legacy; 

  • Access the cash value to pay child's expenses such as education costs. (Withdrawal of cash value may have tax consequences);

  • It's a cost effective way for grandparents to provide a significant legacy.

For the grandchild, he or she ultimately receives a gift that will provide significant benefits: 

  • A growing cash value that can never decline; 

  • Access to borrow from the policy for education, down payment on a home, or to invest in a business;  

  • The policy could also provide an annual income by changing the dividend option to cash; 

  • Life insurance which continues to grow in death benefit to protect his or her future family. 

Case Study 

Let’s look at an example of this strategy.  Grandpa Brian is 65 and has funds put aside for the benefit of his grandson, Ian. 

  • Grandpa Brian purchases a 20 Pay Participating Whole Life policy on Ian, age 11, for an annual deposit of $5,000; 

  • Brian’s daughter, Kelly is named as contingent owner in the event of Grandpa Brian’s death and beneficiary in the event of Ian’s death; 

  • At Ian’s age 31, the policy becomes paid up with no future premiums. 

If Grandpa Brian were to die at age 85 the following could happen: 

  • The ownership of the policy now passes to Ian’s mom Kelly; 

  • The cash value of the policy (at current dividend assumptions) would be $ 134,049 and the death benefit of the policy would be $679,634; 

  • Kelly has a choice to remain the owner of the policy or transfer the ownership to her 31-year-old son without any tax consequences.  

Because of Grandpa Brian’s legacy planning, Grandchild Ian, now age 31, has a significant insurance estate that will continue to grow with no further premiums!  By Ian’s age 45, the death benefit, at current dividend scale, would be $1,030,045 with a cash value of 311,811.  

Please call me if you think your family would benefit from this strategy or share this article with a friend or family member you think may find this information of value.

 

Note – The numbers shown in the Case Study are using Equitable Life’s Estate Builder 20 pay Participating Whole Life policy with maximum Excelerator Deposit Option.


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Eric Lidemark, CLU, CFP, CHS profile photo
Eric Lidemark, CLU, CFP, CHS
Lidemark Financial Group Inc.
(604) 538-6565