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Is there life insurance for a special needs child?
Special needs children present exceptional parental challenges. But how can you ensure that your special needs child will be financially taken care of after you’re gone? Find out more about Special Needs Child Life Insurance options.
Once the all-important question of “How much money should I plan to leave my child?” has been answered, the next step in special needs financial planning is to determine what assets will be used and when they will be passed on.
Typically, special needs trusts (SNTs) are not funded until the parents’ passing. This is because SNTs are complex and somewhat inflexible, and can create an administrative burden. Therefore, while the parents remain alive, it is often easier for them to provide for the child directly.
Reasons Why Life Insurance is the Best Approach for Special Needs Children
The primary reason life insurance can help is because life insurance proceeds are non-taxable the vast majority of the time. You can choose to set up the proceeds as a lump sum pay-out or structure it similar to an annuity. Your child or child’s guardian can get a predetermined monthly sum paid out over the period of many years.
Options are flexible too. If you’re looking to cover the needs of the child after you pass on, then you can get a policy on yourself and set up a trust for your child. You could also get a policy for the child.
Having life insurance in place can bring peace of mind to yourself and your family. Each family situation is unique, and it may be a good idea to meet with a financial planner to discuss your desires and options
Financial Independence for a Lifetime
One of the most common uses of life insurance for children or adults with special needs, and the one that probably first comes to mind when you think about life insurance, is paying for care, housing and other expenses in the event that you predecease them.
If you have a two-parent family and one parent is the primary caregiver, not working outside of the home, your instinct might be that since there’s no salary to replace, there’s no need for life insurance on the primary caregiver.
But remember that if that parent is no longer there, you may have to pay a caregiver.
Insuring the Life of the Special Needs Individual
Assuming they would qualify, purchasing a life insurance policy on the special needs individual’s life is another approach to provide income later in life. In certain kinds of insurance policies, cash value accumulates over time, which could be accessed to provide for your loved one, so consider purchasing it as early in their life as possible.
Usually this arrangement is set up so that a Special Needs Trust, funded by your family’s contributions or the death benefit of a policy on your life, owns the policy, pays the premiums, and is the named beneficiary.
A policy on the life of the parent/caregiver can also be used to fund the trust and proceeds from the policy would continue the care of the special needs individual.
Don’t Wait to Start Planning
Using life insurance to plan for a special needs individual’s future may seem a little overwhelming, but it’s important not to wait too long.
The younger you are the more affordable life insurance can be. And, of course, a serious problem or loss could affect your family at any point.
With proper planning you know that your loved one will have a sound strategy in place for the rest of his or her life.
Using Your Own Life Insurance Policy for Special Needs Children
The most straightforward approach is to purchase two separate policies on yourself. You can use one policy to ensure your other family members are financially secure. For example, you may want to pay off debts, provide for a spouse, or finish paying off your mortgage.
The second policy can provide solely for your special needs child.
Buying a standard life insurance policy allows you to fund the financial needs of your child up to $10,000,000 or more. As the owner of the policy, you can designate your beneficiary (also the guardian/trustee) to use the funds to continue to support your child.
Tips to Consider for a Special Needs Trust
Special Needs Trust Planning
Early planning (like for retirement) is important. Special Needs Trusts are not subject to probate in most places.
Your trust lawyer can tell you if you live in an area where they do.
This provides a massive benefit to your child because probate can last for years.
Do not name your special needs child as the beneficiary
They may not be able to manage the money on their own. They also might lose out on federal and state assistance.
Have a family meeting
It’s important to have everyone on the same page for how the proceeds are to be distributed.
It’s also a good idea that everyone in your family knows what is going on so that everyone can ensure the child has protection throughout their adult life.
Beneficiaries can include friends, family, other children, your lawyer, or financial advisor. The last two will require an administration fee.
Name a Trustee/Beneficiary
With life insurance for special needs children and a special needs trust, carefully consider a responsible person as the beneficiary.
This person will also act as the trustee of the special needs trust. Naming a secondary beneficiary provides an additional layer of support in case something happens to the first beneficiary.
Prepare a Last Will and Testament
To ensure there are limited tax issues and to avoid probate problems, prepare your last will and testament. Work on this in conjunction with a lawyer and financial advisor.
The special needs child should generally not be named in the will as this could deny them federal and state benefits to which they might be entitled.
Speak with non-profit agencies
If you are on a limited budget consider accessing any and all non-profit agencies.
There are many agencies which can provide additional or other necessary support for your special needs child.
Apply for government support
Contact both federal and state agencies and apply for any assistance for which your special needs child can qualify.
On Guardianship and Conservatorship
Caregivers are generally required to apply for guardianship or conservatorship when the special needs child reaches the age of 18. This allows them to maintain control over the finances and healthcare decisions relevant to the child’s care.
Different levels of control are available depending on the ability of the special needs child to function. This process takes about a year so it should commence a year before the child reaches age 18.
When it comes to setting up a Special Needs Trust and funding it with life insurance, every family situation will be different. Make sure to contact professionals to help answer the “what if’s” along the way.
Consider an ABLE Account for a Special Needs Child
Another approach is to set up an ABLE (Achieving a Better Life Experience) account for your child.
These are savings accounts for children who developed a disability before the age of 26.
It allows the child to set aside over $2,000 each month so they can continue to receive Social Security and any state benefits.
This can make a huge difference in the life of a child who is or will be able to work in a limited capacity.
Types of Life Insurance Used for Special Needs Trusts
When looking to fund a special needs trust, some types of life insurance policies are more suitable than others.
Along with not overpaying, most of our special needs parents tell us they want their life insurance to have three distinct features:
• A policy they won’t outlive
• Prices that won’t increase as they age
• A policy that can be cancelled without penalty if their special needs child precedes them in death+
The various types of life insurance that can be used to fund an SNT
Term Life Insurance
Term life insurance provides coverage for a defined period of time, normally the time in which premiums are paid. After that period ends, the policyholder can choose to continue to pay for the policy or end coverage.
A term policy pays a benefit should the policyholder die within the period covered under the policy.
The premiums for term policies typically increase each year as the insured gets older or are level for a specified number of years, such as 20, after which the policies are typically dropped due to the steep increase in premiums at the end of the guaranteed term
Whole Life Insurance
Unlike term insurance, a whole life policy lasts for the policyholder’s entire lifetime and provides both death benefit protection and cash value. Part of the premium paid by the policyholder goes into a cash account which accumulates over time.
The cash value tends to accumulate at a higher rate when the policyholder is younger and lessens as she ages. Further, many of these policies pay dividends, which add additional value to the policy.
Policyholders may withdraw money from their whole life policy but will be charged a fee or, in the case of a loan, the holder will be obligated to pay back the borrowed amount with interest.
Universal Life Insurance
A universal life policy permits the policy holder to adjust death benefits and premium payment to fit any change of circumstances for the holder.
Premiums can be credited to an accumulation fund from which premium costs are deducted and to which interest is credited.