The Cascading Life Insurance Strategy

A Lifetime Gift for your Grandchildren

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” that will generate:
• Tax deferred or tax free accumulation of wealth;
• Generational transfer of wealth with no income tax consequences;
• Avoidance of probate fees;
• Protection against claims of creditors;
• Providing a significant legacy.
Under the Cascading strategy a grandparent would purchase an insurance policy on his or her grandchild and fund the policy to create significant cash value. The fact that the cost of life insurance is lowest at the younger ages allows the grandparent to establish a significant plan that allows the cash value or investment fund in the policy to grow tax deferred. The grandparent would own the policy and name their adult child as contingent owner and primary beneficiary. When the grandparent dies their adult child now becomes the owner of the policy.

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 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 $ 154,000 and the death benefit of the policy is approximately $800,000. 

As a result 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!

In summary, what are the benefits of the Cascading Life Insurance Strategy?

  • The funds have skipped a generation with no income tax consequence to the grandparent or the estate. (This is due to a provision of Section 148 of the income tax act which states that the transfer of a cash value life insurance policy from a grandparent or parent to a child or grandchild is not subject to income tax).
  •  There are also no probate fees to be paid.
  • Both the cash value and death benefit receive preferential treatment in protection against the claims of creditors.
  • The parents can access the cash value through withdrawal or loan which could be used to pay for their child’s expenses such as education costs. (Withdrawal of cash value may have tax consequences).
  • It’s provides a cost effect way for grandparents to provide a significant legacy.

If you feel that this concept could be of value to you or someone you know, please call me. I would be happy to provide you with further information specific to your situation.