# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Waterfall Concept

Written By
Paul Tracy
Updated November 11, 2020

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.

 
Ask an Expert about Waterfall Concept
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Waterfall Concept.
Be the first to ask a question

If you have a question about Waterfall Concept, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Waterfall Concept, then please ask Paul.

Ask a question Read more from Paul

Read this next

Paul Tracy - profile
Ask an Expert about Waterfall Concept

By submitting this form you agree with our Privacy Policy

Share
close
Don't Know a Financial Term?
Search our library of 4,000+ terms