How Getting Insurance for Kids can Help Crush Tax

Recently, we have been working with some affluent families planning to insure their children. Some people ask us why we would even worry about this since there would hardly be a financial impact if a child passed away. We agree that the immediate impact is small but also think to ourselves... you have much to learn about the power of insurance, young grasshopper.

Permanent insurance on a child is much more than a death benefit. It CRUSHES TAX. Let me quickly explain how your clients can use insurance to transfer money to their children in a tax-effective way.

As you know, when a permanent insurance policy is put in place, there is(can be)an associated cash value inside that policy. Think of it as equity in a house, and you can access this equity in a few different ways. One of the ways is by redeeming the policy and withdrawing the cash. This redemption(may trigger taxes to the policy owner)is 100% taxable to the policy owner.

What if the parents buy a life insurance policy that has their child as the life insured but makes the premium payments? Lucky for us, ss 148(8) allows a parent to pay the premiums of a life insurance policy contract on their child and then transfer ownership of that policy on a tax-free basis to that child. This transfer can take place when the parents see fit for the child to take over control of that asset for themselves.

Now the child has ownership of the policy; they can redeem their policy but are now taxed at their tax bracket and not their parent's. This maneuver has allowed us to forgo redeeming the policy at a higher tax bracket and passing the wealth to a child who can pay less tax than the parents.

A strategy like this is not something that fits every family, and I understand that we are not eliminating all taxes but every legal way our clients have to save money on taxes they want. This could be something that some of your top clients might want to do to pass wealth to their kids without paying a high percentage of tax.

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