Guide to Life Insurance for Parents of Children with Disabilities

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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 health care aide.

Estimating future expenses

Some of the possible expenses may include the following:

  • Physical therapy
  • Medical expenses, including doctor or hospital fees and prescriptions
  • Insurance premiums
  • Transportation
  • Education
  • Rental or other housing needs
  • Food and other living costs
  • Emergency savings
  • Cost of a service animal
  • Adaptive equipment
  • Legal advocates or other support persons

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 they do so. 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 would 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’s 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 less than $2,000 in assets. This is also true if you leave money directly to your child in your will.

A better option is 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 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