DEFINITION of 'Waterfall Concept'

A life insurance plan that provides a tax benefit in regards to intergenerational transfers of wealth. The concept occurs when a tax-exempt insurance policy is rolled over to a child or a grandchild. The origin of this term is derived from the fact that this insurance plan is similar to waterfalls in that it only flows downwards.

BREAKING DOWN 'Waterfall Concept'

The tax benefit occurs when the initial insurance policy is rolled over to the child or grandchild. After the transfer there are no more tax breaks, and so any funds that are withdrawn from the policy are subject to normal tax liability. However, clients can implement different variations on the waterfall concept to meet different objectives.

RELATED TERMS
  1. Distribution Waterfall

    The order in which a private equity fund makes distributions. ...
  2. Insurance

    A contract (policy) in which an individual or entity receives ...
  3. Key Person Insurance

    A life insurance policy that a company purchases on a key executive's ...
  4. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  5. Insurance Industry ETF

    A sector-following fund that invests primarily in insurance companies, ...
  6. Total Insurable Value

    Total insurable value is the value of property, inventory, equipment, ...
Related Articles
  1. Insurance

    Do You Need Life Insurance For Your Child?

    Taking out life insurance for a child is hard to imagine, but having it can do more than just give you peace of mind.
  2. Insurance

    Whole Life Insurance: A Gift That Grows

    The gift of whole life insurance may not be exciting for a child, but it could eventually help them pay for college or purchase their first home.
  3. Insurance

    Protect Your Kids And Pets With Custom Insurance

    Find out how to protect those you love the most with specialized policies.
  4. Retirement

    Why Own Life Insurance in a Qualified Retirement Plan?

    What are the pros and cons of owning cash value life insurance in a qualified retirement plan?
  5. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  6. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  7. Financial Advisor

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
  8. Financial Advisor

    Life Insurance for a Newborn Baby

    In most cases, this is unnecessary, though a small policy offers benefits in certain cases.
Hot Definitions
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
  6. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability of potential investments.
Trading Center