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Guide to life insurance for parents of children with disabilities

A mother sits at a computer while her special needs child sits next to her; they are laughing.
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Caring for a child with special needs can be both a great joy and a challenge. You want your child to live to their full potential, in whatever form that takes, for their entire life. That may take additional resources, especially if you should die while they are still in need of care.

Securing your child’s future will take a great deal of planning and much of that revolves around the need to ensure that your child has the financial resources they need, both now and as an adult. One part of that equation may include a life insurance policy — or policies — to provide for your child’s needs after you’re gone.

How much life insurance should you have as a parent of a child with disabilities?

Determining how much life insurance you need is a highly personal decision based on your age and situation, as well as on the needs of your dependents. For many people, the need for life insurance decreases as their children grow up and head out on their own. But if you have a child with special needs, it’s a bit more complicated.

Your first step is to sit down and make a list of your child’s future expenses as best as you can. It may help at this point to work with professionals who understand those with special needs — from a disability rights lawyer to a social worker or healthcare aide.

Estimating future expenses

Some of the possible expenses include the following:

  • Physical therapy or occupational therapy: Parents of special needs children may spend thousands of dollars on physical or occupational therapy every year. One session may cost around $20, but one session could cost $150 or more without government benefits or private health insurance.
  • Medical expenses, including doctor or hospital fees and prescriptions: A special needs child may need more medical care than their average peer. For children with cerebral palsy, the average direct medical cost to a family is $93,942 without government benefits or private insurance. Luckily, Medicaid covers nearly half of children with special needs in the U.S.
  • Insurance premiums: More than half of children with special needs only have private insurance rather than Medicaid or a combination of Medicaid and private insurance. Unfortunately, private insurance premiums for children with special needs can be steep,
  • Transportation: A special needs child may require modifications to their vehicles, such as wheelchair lifts. For persons with cerebral palsy, non-medical costs, including transportation, cost an average of $84,732 per family.
  • Education: Many students with special needs opt to attend private schools that cater to students with special learning considerations. The cost of attending a private school varies, but costs for tuition, books and uniforms can add up.
  • Emergency savings: In case of a medical emergency, many families with special needs children prefer to have an emergency savings fund. These funds are one way families can plan to pay for medical emergencies or future caregiving, should their child need it.
  • Cost of a service animal: Service animals, such as guide dogs and emotional support animals, can be hugely important to persons with special needs. Families may want to factor in the cost of keeping these animals — including food, pet sitters and veterinarian.
  • Adaptive equipment: Adaptive equipment refers to any device that makes daily tasks easier for persons with disabilities or special needs. These devices may include grab bars in the shower, a wheelchair lift or hearing aids.
  • Caregivers or support personnel: Employing a caregiver can be expensive. The 2020 national median cost of employing a home health aide for 40 hours a week is $4,160 per month.

Which type of life insurance policy is best?

The type of insurance policy you purchase will be determined by your financial situation as well as by your estimation of the challenges your child will face in the future. Although many financial experts prefer term insurance to whole life, in your case, the opposite might be true.

Term life insurance policies expire after a predetermined number of years, with no financial benefit to you after the term period ends. A whole life policy, however, will remain active as long as you pay your premiums.

If you anticipate that your child will outgrow the need for extended care in the future, then term insurance might be a good bet. But if your child’s disabilities will remain with them for life, then a whole life policy might be a better choice, since it will provide a death benefit no matter when you die. And although the premiums are higher than they would be for term insurance, your whole life policy builds up a cash value that can be accessed before your death if needed.

By shopping around, you may also be able to find a life insurance policy with a specific rider for children with special needs. This type of rider offers additional coverage that is suited for your situation. A good life insurance broker can help you find a policy with this type of rider.

Another option is survivorship, or second-to-die life insurance. These joint policies cover both you and your partner or spouse and pays out the death benefit only when both of you have passed away.

Setting your life insurance beneficiary

If your child is receiving governmental assistance such as Supplemental Security Income or Medicaid, it may be best to avoid naming your child directly as the beneficiary of a life insurance policy. This may disqualify them from receiving assistance, since they must have no more than $2,000 in assets. This is also true if you leave money directly to your child in your will.

A better option could be to create a special needs trust for your child, sometimes called a supplemental needs trust. This type of financial vehicle directs money to your child as needed, and also mitigates the tax concerns that your child might have if they were receiving money directly from a will or other account.

What is a special needs trust?

A special needs trust includes three people: you, who funds it; your child, who receives the benefits; and a third person, who acts as manager of the trust, or trustee. This person should be someone who is both good at handling money and someone you trust implicitly, because they will ensure that the financial needs of your child are met after you are gone.

Since the trustee will play a large role in your child’s life, it’s important to choose someone who is responsible and dedicated to your child’s quality of life. If you have no one in your personal world who fits the bill, a professional trustee can be hired. This could be a bank or other individual who will distribute the trust’s assets as needed.

A special needs trust has some nice benefits. You have full control during your life. You open the account and fund it as you wish. In addition, others, such as relatives and friends, can add money to the trust. And since the money is held in reserve for your child, it does not impact SSI or Medicaid payments.

You’ll be given a tax ID number for the trust and the trust must file a tax return each year to report income earned. When income is given to your child, it is taxed at the beneficiary’s presumably lower tax rate.

Creating a special needs trust is complex and you’ll want to work with a lawyer or financial advisor on doing so. Since a special needs trust is created specifically for the needs of a person with physical or mental disabilities, it is generally preferable to a regular trust in that it takes the special circumstances of your child into account.

Ask for help

Raising a child with special needs can be difficult at times, but it’s important to remember that you’re not alone. In addition to your friends and family, there are dedicated professionals in a variety of areas who can help you make decisions that will allow your child to live life to the fullest. These include:

  • Medical professionals
  • Social workers
  • Lawyers and legal specialists
  • Support organizations, such as United Cerebral Palsy or Parents Helping Parents
  • Financial planners
  • Your government representatives, who can advocate for you at the local, state or national level
  • Co-workers, ministers and other local contacts
Written by
Mary Van Keuren
Insurance Contributor
Mary Van Keuren has written for insurance domains such as Bankrate, Coverage.com, and The Simple Dollar for the past five years, specializing in home and auto insurance. She has also written extensively for consumer websites including Reviews.com and Slumber Yard. Prior to that, she worked as a writer in academia for several decades.
Edited by
Insurance Editor