Parents who have built up sufficient wealth for their own needs may next be looking for ways to transfer that wealth in a tax-efficient manner to their children and grandchildren. Ideally, they’ll not only want to share their assets, but also the lessons they’ve learned and wisdom they’ve gained in accumulating that wealth. Life insurance is a time-tested tool that has long been used for wealth protection and growth, and can also be effective for wealth transfer.

Consider that if parents accumulate traditional investments, they will have to pay tax on capital gains before transferring to the child to invest. It’s a double wallop if the child is still a minor, with the tax on most investment income being attributed back to the parents. It may not be much better with adult children, who may be the same tax bracket as the parents, or even higher. Either way, the parents will have no further control over the gifted funds.

Parents can purchase life insurance on their minor child, or on their adult child with consent. Policy deposits over the required annual premium can then grow tax-sheltered. Parents have full control over the policy, then at an appropriate age, they can transfer it to the child. A special insurance rule allows certain down-generation transfers to be treated as a tax-free rollover. If planned early enough, this can even be done in stages, from grandparents as original owners, then to parent and on to child.

Parents may wait until they have excess cash, or could obtain the insurance while the child is a minor. Not only is underwriting more lenient at younger ages, but premium cost is also lower. After transfer, a withdrawal may be taken out of the cash value if desired, though a portion may be taxable to the child as current policyholder. And apart from the transfer of cash value, it’s a gift of family values, with the child’s insurability being secured to protect the next generation.