Life insurance for special needs children can be an essential part of their financial planning as they grow up. There are even ways to ensure that a life insurance policy can provide for them.
Money that comes from a life insurance claim is non-taxable in most cases. That means you can provide for your special needs child even after you’re gone. We will cover how to set that up in Part 1.
There are also ways to ensure the child can hold an affordable life insurance policy as an adult. We will cover that in Part 2 – Insuring a Special Needs Child.
- Reasons why life insurance is the best approach for special needs children
- How to save money on life insurance for a special needs child
- How do life insurance companies define a special needs child?
- How much life insurance will a special needs child require?
- Using your own policy to cover your child
- Pros and cons of term life insurance
- Pros and cons of permanent life insurance
- Guaranteed universal life policies
- Using your own policy to fund a special needs trust
- Tips for creating a special needs trust
- ABLE accounts
- Insuring a special needs child
Part 1: Life insurance for special needs children where the parent is the insured
Even though you may have other assets like an IRA, 401(k), stocks, bonds, or real estate, they can all be taxable when they become payable. Leaving these assets to a child with special needs through your will is not always the best approach.
Other family members contest wills and entangle assets in a dragging probate process, often taking years. Also, if the child has more than $2,000 put into their account, the state or federal government may cut off any assistance.
Two ways of getting around these issues are to designate a guardian/trustee or set up a Special Needs Trust. Both options ensure that someone will ensure your child continues to receive financial support.
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 payout 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.
How to Save Money on Life Insurance for a Special Needs Child
You have enough other costs in your life without trying to figure out how to save money on life insurance. Below are some of the best ways to make sure that you don’t end up paying too much.
Speak with an Independent Agent
There are two types of agents you can work with to maintain a continuous relationship, captive agents, and independent agents. Captive agents can only offer the products of one company. Independent agents can offer life insurance from many companies.
No matter the price of different life insurance policies within a company, their underwriting guidelines are the same. For example, if they charge an arm and a leg for someone with high blood pressure, there is no getting around that.
By speaking with an independent agent, you can go with a company that has the best underwriting guidelines for you.
Term Costs Less than Permanent Life Insurance
Depending on what you want to do, term life insurance will save you money over permanent life insurance. The problem is that it might not be right for you.
If you can set aside enough money to invest every month, then you may only need to cover your working years. That way your children and spouse will be provided for. If you aren’t sure that you can put away enough money to cover your child’s particular needs for the rest of his or her life, then a permanent life insurance policy can ease that stress.
How Do Life Insurance Companies Define a Special Needs Child?
There is no legal or legislative definition to cover this question. So it will vary slightly from company to company. Some states have their own definitions which will be different from one state to the next.
Broadly speaking, a special needs child is essentially any child (at any age) who has little or no ability to financially provide or care for themselves due to a disability.
This could include any or a combination of the following physical disabilities, developmental or psychiatric impairments.
- cystic fibrosis
- congenital heart problems
- spina bifida
- muscular dystrophy
- chronic asthma
- other types of physical impairment
Development or Psychiatric Impairment
- Down’s syndrome
- a variety of severe behavioral issues or functional issues
A special needs child can also be an adult child who has drug dependency problems.
A child’s development of special needs can occur at any age and for any reason. The primary consideration is that the child will need some form of ongoing care and financial assistance.
How Much Life Insurance Will a Special Needs Child Require?
This is a tough conversation to have because it requires considering what your child will need for the rest of their life. There is no hard and fast life insurance calculator for that.
First, have a conversation with your child’s doctor to determine potential health care needs now and in the future. Is their condition deteriorating or relatively stable?
Second, what is your child’s probable lifespan? That can make a difference in how much life insurance you need to set your child up financially. It can also make the difference in planning for things like college and a career.
It is also wise to consider the cost of where the child will live. If your child can live independently, then there is the cost of living in that city to consider. If he or she requires special care attendants, a group home, or a special care medical facility, then planning for those expenses can save anxiety down the line.
This is a heart-wrenching conversation to have, but it’s in your child’s best interest.
The final step is to use the factors listed above to figure out the current annual cost. Then consider inflation. A safe number would be 3% every year. Finally, take into account your child’s predicted lifespan.
Now the number you get from this would most likely cover your child for life if something were to happen to you tomorrow.
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.
Pros and Cons of Term Life Insurance to Provide for Special Needs Children
Term life insurance is the simplest form of life insurance. It pays death benefits only. You buy the policy in periods of time such as 10, 20, or 30 years. Because it just covers a period of time in addition to being simple, it’s the cheapest form of life insurance.
The drawback of term life insurance is that it will not cover you for your entire lifespan. Many companies have the option to renew a term policy, but it can be an enormous price jump from what you were previously paying. If you have experienced health problems since you last went through underwriting, you could encounter a rating or decline.
Even if you decide term is the best choice for your family right now, you can change your mind later with minimal inconvenience. Most term policies have a conversion feature. This allows you to change your policy from a term to permanent policy at specific points throughout the term. Check with your agent to see whether your company will convert a term policy to a Whole Life or a Universal Life policy.
The good news is that a conversion does not require you to undergo a new medical exam. Most of the time, there aren’t even medical questions. The new price will depend solely on your age when you convert the policy over. Then you have coverage for the rest of your life.
Pros and Cons of Permanent Life Insurance to Provide for a Special Needs Child
Permanent life insurance policies are more comprehensive than term ones. They have extra features on top of covering you for life. (Technically they cover you to age 121.) As long as you pay your premiums on time, you never have to worry about the policy terminating. You will never need to worry that your child will be unprotected.
A permanent policy is more expensive. The main attraction to permanent policies is that they have a cash value accumulation feature in addition to the death benefits. The cash value accumulation allows you to borrow against your life insurance policy. They hold your death benefits as collateral in case you don’t pay back the loan and accumulated interest.
Under the umbrella of permanent life insurance you can find:
- Whole Life
- Universal Life
- Guaranteed Universal Life (a hybrid)
A Quick Look at Guaranteed Universal Life Policies
A Guaranteed Universal Life insurance policy (GUL) is cheaper than other permanent policies. This can make them an attractive choice for funding a Special Needs Trust.
A guaranteed universal life policy is priced similarly to a term life insurance policy because it does not have the cash value accumulation. You just lock in the rates at your current age. You can also select a specific age to end your coverage. This could be 90, 95, 100,0 105, or even 121. This also takes some of the cost out.
The best part (in our opinion) of having a guaranteed universal life policy to provide for your special needs children is the ability to annuitize the death benefit. Most policies are paid out as a lump sum. Instead of a bunch of cash all at once, you can have the proceeds paid over time. That way you can ensure your child won’t lose any state or federal assistance. (Annuitized payment also makes the policy cheaper.)
Using Your Own Life Insurance to Fund a Special Needs Trust
The best way to provide ongoing support for a special needs child is to set up a Special Needs Trust.
This ensures that money is available for continuing financial support for both the living and medical costs your child may face after you’re gone.
Remember that life insurance proceeds are generally non-taxable. You can design the trust so that it also preserves any Medicare and Social Security Disability Benefits. It can also protect any state benefits that your state provides.
Before setting up a Special Needs Trust, speak with a trust lawyer and a financial planner. There are both legal and tax pitfalls if the trust is not set up in a certain way. This is a double concern if you have other assets, a will, or an estate.
It’s also wise to speak with an independent insurance agent so they can shop the market for you and find the best fit for your family.
Tips to Consider for a Special Needs Trust
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.
The following are a few pointers to take into consideration when setting up a Special Needs Trust if you’re planning on funding it with life insurance for special needs children.
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 nonprofit 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.
Parents are also about to contribute up to $14,000 annually to an ABLE account without any penalty.
The challenging part of ABLE accounts are that each state has its own requirements that must be met in order to set up this type of account.
Part 2: Life Insurance for a Special Needs Child where the Child is the Insured
We’ve had a few questions over the years about insuring special needs children.
Talking about life insurance for yourself is challenging enough. Talking about life insurance to cover children can be an emotional sinkhole.
But, in this case, it’s taking advantage of the conversion features on child riders to make sure that a special needs child can get an affordable policy that might not be otherwise available.
This way, their family is protected when they grow up.
Buying life insurance for children usually involves adding a child term rider to the parent’s policy. Sometimes a parent can add the rider later, but most often, it needs to be added on the application for a new policy.
More people prefer riders because they’re simple and extremely low-cost. The trick with special needs children is finding a life insurance company who won’t ask medical questions. Most will want to know as much about your child’s medical history as they do about yours.
There are a couple of less strict companies. Right now, American Amicable Life Insurance has the best term life insurance child rider for special needs kids. They don’t do any underwriting for the rider. That means they don’t ask any medical questions.
Banner (aka Legal & General) also has a child term rider that doesn’t ask any medical questions, but their conversion features aren’t as strong.
If you’re also considering policies for all of your children, the following article can offer more tips, advice, and sample rates:
How Abrams Insurance Solutions Can Help
As independent agents, we work for you. Our goal is to find the coverage that will best protect your family at the lowest price. Every family with a special needs child will require life insurance tailored to their unique situation.
Our team of experts is on hand to answer any questions you have about life insurance for special needs children. Because we are independent agents, we can shop the market to find the policy that will fit your age, budget, health, and needs. Rather than shoehorn you into a policy that doesn’t quite fit, we work with over 70 top-rated life insurance companies to find the best solution for your family.
Every family situation is unique so call Abrams Insurance Solutions at 858-703-6178 today. We can help.