Should an Intergenerational Transfer Be Part of Your Estate Planning?

Posted on November 22, 2013 and updated December 2, 2013 in Life Insurance Canada News 5 min read
Jorge Ramos CFP CLU

According to Jorge Ramos, Director of Advance Marketing at Industrial Alliance, an inter-generational transfer of a life insurance plan is a tax-effective way for a person to create and leave a legacy for their children and grandchildren. Although the concept of an intergenerational transfer might seem confusing, it really is not.

How does Intergenerational Transfer of Life Insurance Work?

The intergenerational transfer can be used in a number of ways. Ramos says that one way an intergenerational transfer of life insurance works is when grandparents choose to share their legacy by purchasing a permanent life insurance policy on the life of their own child and list their grandchild as the beneficiary. There are several reasons why the life insurance policy is purchased on the adult child.

  • The grandparent’s age or health may preclude them from purchasing a permanent life insurance policy in their own names.
  • The grandparent’s age and health would drive the cost of a permanent life insurance policy too high, but their adult child may still be young enough and healthy enough for a substantial reduction in premiums.

Why Permanent Life Insurance Works Best

Because no one can actually predict the length of their life, using a term policy to leave a legacy for children or grandchildren doesn’t always work as planned, particularly in an intergenerational transfer situation. By using a permanent life insurance plan as the basis for the intergenerational transfer, the grandparents can gain a high life insurance benefit that will not expire as it would with a term policy.

Also, a permanent life insurance plan accumulates value outside of the benefit amount known as the cash value. In the case of the intergenerational transfer of life insurance that is to be left as a legacy for the grandchildren, grandchildren can access the cash value amount to pay for expenses such as education costs or a house down payment. Since the cash value is accessible before the death benefit, the grandparents may still be alive to enjoy some of the benefits their planned legacy has created.

What Are the Disadvantages of the Intergenerational Transfer of Life Insurance?

According to Ramos, there can be two particular disadvantages to an intergenerational transfer that involves life insurance, but they tend to be minor considerations to someone hoping to use life insurance as a part of their intergenerational legacy.

“The cost for a permanent life insurance plan can still be quite high, even when the grandparents ‘borrow the life’ of their adult child,” says Ramos. The age of the “borrowed life” might even be their 30s, 40s, or even 50s, and this can cause the premiums to be quite high. Some might then wonder why the grandparent does not just bypass their own child and purchase insurance on the life of the grandchild — because considering the child’s age and probable good health, the cost for the permanent life insurance policy would be low. However, as Ramos claims, most insurance companies would be cautious about placing such a large amount of life insurance on someone so young.

The second disadvantage to using life insurance as a part of an inter-generational transfer, according to Ramos, is that it requires a high degree of insurability. The grandparents’ own insurability is low, so they need to “borrow the life” of their adult child. However, there are no guarantees that the adult child’s life is any more insurable than the grandparents. The use of life insurance as a part of an intergenerational transfer will only work if there is someone with guaranteed insurability.

The concept of sharing the wealth and leaving a legacy for loved ones is not a new one, but as the population ages and there are more legacies to leave, it is becoming more and more important to find a way to share the wealth in the most tax-effective way possible. Canadians have worked too hard all of their lives to have their legacy shared between their loved ones and the Canadian Revenue Agency. An intergenerational transfer of life insurance is one of the best ways to leave a legacy that will be cherished for generations to come.

Not only does an intergenerational transfer of life insurance allow a person to leave a large death benefit for a grandchild to use when their parent dies, but it also allows a grandchild to access some money through the cash value. This gives the grandparents and the parents the opportunity to provide for the youngest generation when they can most benefit — during their university years or when they are starting their own families. This allows grandparents and parents to enjoy the legacy they leave.

Jorge Ramos has 20 years’ experience helping people manage their wealth and proudly build a legacy that can be passed down to the next generation. His ability to see the bigger picture and pass this knowledge down to his clients has been the cornerstone of his success.

For more details on permanent life insurance and intergenerational transfers, please contact us at 1-866-899-4849 or contact us through our whole life insurance quote page.

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