What is a Waterfall Concept?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 August 2019
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The waterfall concept involves the creation of a life insurance strategy that will prove to be beneficial to more than one generation in the family. Essentially, the waterfall concept calls for the engagement of a life insurance plan that will roll over from parent to child. In addition to providing coverage for the younger generation, the waterfall concept can also allow the creation of a tax benefit.

This particular financial strategy is named for the action that is associated with a waterfall. Because waterfalls involve a point of origin that is followed by the water trickling down to another level, the idea helps to illustrate how a waterfall concept works. Since the concept begins with one generation arranging for life insurance that will over time trickle down to a succeeding generation, insurance that is rolled over functions much like the waterfall, in that the benefit goes from the source to related areas.

Creating a waterfall concept is not that difficult. The process begins with the establishment of a whole life insurance policy that is tax exempt. The originating party will continue to pay the premiums for the policy, which will provide all the benefits of any whole life coverage, including building a cash value. After a certain point in the maturity of the policy is realized, the holder has the option of transferring or rolling over the policy to a child or even a grandchild.


When the insurance plan is rolled over, it is possible for the original holder to realize a tax benefit from the action. This helps to make the waterfall concept attractive on two levels. First, the process allows the holder to create an asset that can be provided to the child for further development. Second, the waterfall concept provides a tax benefit on a one time basis to the holder. Since the policy can be rolled over at any point once the specified point of maturity is realized, the holder can choose which year to take the benefit.


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