A Lifetime Gift for Your Grandchildren
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.
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 their adult child as contingent owner and primary beneficiary;
- The cost of life insurance is lowest at younger ages, allowing the grandparent to establish a plan that allows the cash value in the policy to grow tax deferred;
- When the grandparent dies his or her adult child becomes the owner of 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.
Let’s consider an example of the Cascading Life Insurance Strategy. Grandpa Brian is 65 and has funds put aside for the benefit of his grandson, Ian. He purchases a participating Whole Life policy on Ian, age 11, for an annual premium of $5,000 for the next 20 years. 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.
If Grandpa Brian were to die at age 85, the policy now passes to Kelly with no tax consequence. The cash value of the policy (at current dividend scale) at that time is approximately $ 133,000 and the death benefit of the policy is approximately $672,000.
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Note – The numbers shown in the Case Study are using Canada Life’s Estate Achiever 20 pay Participating Whole Life policy with maximum Additional Deposit Option.