As a parent or grandparent, you want to pass your wealth to your children or grandchildren in ways that are the most effective and useful to them – and the most tax-efficient way. By purchasing a whole life or universal life policy on the life of your child or grandchild, you can invest money on a tax-deferred basis inside the life insurance policy and guarantee the insurability of your child or grandchild. As well the policy is transferred tax free and outside the grandparents’ estate to the child or grandchild.
In addition, while you’re alive and contributing to a permanent life insurance policy, the cash surrender value (CSV), grows as you contribute – for their needs later to buy a house or fund an education after your death. The child can access the CSV of the policy in three ways: withdrawals, policy loans or as collateral for a loan. Each type has its own issues and taxation.
The policy also guarantees the child’s insurability for the amount purchased and is under the control of the parent or grandparent during their lifetime.
Here’s a specific example of creating a cascading effect of wealth through life insurance:
- You’re a grandparent, age 60, and you purchase a 20-pay whole life participating policy on the life of your 5-year old grandson with an initial face amount of $500,000. The annual premium with maximum allowable deposit is $6,865 a year. The CSV at age 25 is $ 175,1141 and the death benefit is $1,163,9301.
- At age 80, you transfer policy ownership to your 25-year old grandchild, tax free, who can use the policy’s CSV as an additional asset that can be either accessed through a policy withdrawal, a policy loan or collateralization of the CSV. Each type has its own issues and taxation
- The policy continues to grow and when the child is 65, the CSV of $915,973 could provide the option of additional source of funding in retirement either through withdrawal, policy loan or collateralization.
- Cascading your wealth to next generations is both a loving and a financially-supportive gesture. Life insurance is one way. There are others. Talk to your professional advisor about the best choices for your situation.
1This is a life insurance policy illustration with values that are not guaranteed. The CSV and death benefits are subject to market fluctuations and may be different than the values illustrated. The CSV and death benefit are based on a Canada Life Wealth Achiever – Max 20-insurance illustration as of August 29, 2013.
Mike Ouellette is an enthusiastic financial consultant, with his prime focus being young families who are interested in learning about planning for their financial future. If you have any questions or are interested in learning how to begin planning for the future of your family, he’d welcome your questions regarding Registered Education Savings Plans, Mortgages, Retirement Planning, Income Protection, or any other financial worry you’d like to have addressed.