Waterfall Concept

Written By
Paul Tracy
Updated July 29, 2021

What is a Waterfall Concept?

A waterfall concept is an insurance strategy whereby a child or grandchild inherits a tax-exempt whole-life insurance policy.

How Does a Waterfall Concept Work?

For example, let's assume that John wants to buy life insurance but also wants to give money to his son before he dies. John buys a tax-exempt whole-life insurance policy and pays the premiums for ten years. The policy builds up a cash value in addition to insuring John's life. The dividends and interest earned on the investments within the policy are tax-deferred.

At the end of ten years, John transfers the policy (or "rolls it over") to his son. After the transfer to the son takes place, the insurance policy loses its tax benefits. This means that the son now owns the insurance policy, but any funds that come from the policy are taxable.

Why Does a Waterfall Concept Matter?

The waterfall concept is an estate-planning strategy that provides benefits to the inheriting generation after providing tax advantages to the original owner.

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