Cascading life insurance is a tool that transfers money free of tax and probate to subsequent generations.

 

Here’s how it works: A grandparent might purchase a universal life insurance policy and funnel $250,000 into it over five years. This client is the policy’s owner but he has named an adult child the contingent owner, and the policy is actually placed on that person’s life instead. Meanwhile, the grandchild is the beneficiary.

 

Once the grandparent dies, the son or daughter becomes the owner and has access to the investments that have accumulated, tax- and probate-free. The adult child can then draw from the policy or simply reserve it for the grandchild, who will receive the money upon the parent’s death.

 

There are no taxes, there is no fee, there are no lawyers, there is no trust and there are no accountants.

 

One reason that cascading (also known as “waterfall”) insurance can be a good idea is that whole life policies become difficult to obtain and expensive as people age and their health declines.

 

Cascading insurance offers other benefits, too. Not only do the primary owners have control over how the money is distributed upon their death, but investments inside the policy are protected from creditors. That’s an advantage for high-net-worth clients who own businesses. It’s also an advantage to those that want to ensure that the money stays in the hands of their children or grandchildren in the event that their adult child’s marriage breaks down.

 

Tim