Raising a special needs child can be a truly fulfilling act, as you care for your child and do whatever it takes to help them become their best self. But you may also have difficulties from time to time, including financial challenges. One question you could face is whether it would be wise to have a life insurance policy for your child. It can make your child more insurable in general so that if they want to purchase a policy later in life, they are more likely to find a company that will work with them. Additionally, if they should pass away while in your care, the policy’s death benefit can help with funeral or other costs that remain. Bankrate’s insurance editorial team examines the ins and outs of life insurance for special needs children to help you make a more informed decision that works for you and your family.

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Life insurance for your special needs child

As a parent, you are probably familiar with all the reasons why you might want to purchase a policy that provides financial support for your children if you are gone. But a policy that has your child as the policyholder and you as the beneficiary can also be a sound financial move for several reasons.

Protect the child’s insurability

When a special needs child grows up, their medical issues might make it difficult or impossible for them to get life insurance coverage. If a policy can be found, it could be costly. Purchasing permanent life insurance for your child at a young age, if it is available, could help ensure that they are able to stay covered as they grow up. In fact, newborns may be automatically eligible for coverage up to a certain age, so getting coverage while your child is a baby could be a good purchase.

Provide for funeral expenses

Funerals can be costly. No one wants to think about their child’s funeral expenses but planning ahead can save you stress if the worst happens. Life insurance policies pay a death benefit after the insured passes away. This can be hugely beneficial for parents, as the death benefit could cover funeral expenses and also allow time to grieve without worrying about money.

Types of life insurance for special needs children

There are two basic types of life insurance: term and permanent. These differ in numerous ways, including cost, length of policy and whether there is a cash value. Either type may be a good choice for your special needs child depending on their circumstances. Both types pay a death benefit to the beneficiaries if the policyholder passes away.

Life insurance for special needs children may be less common than it is for adults, but coverage options do exist. Here are some details to help you understand the differences in these two main types of insurance:

Term life insurance:

  • Lasts for a certain number of years, usually between one and thirty.
  • Generally the lowest-cost life insurance you can buy.
  • Has no other benefits, such as a cash value that can be borrowed from.
  • Can sometimes be converted to a permanent policy at the end of the term.
  • Can be a good choice if it’s likely that the special needs child will outgrow the need for insurance.

Permanent life insurance:

  • Lasts for the life of the policyholder, as long as premiums are paid.
  • Is usually more costly than term insurance.
  • Has a cash value that accrues over time and can be borrowed against.
  • Comes in a variety of sub-types, such as universal life and whole life.
  • May be a good choice if the special needs child is likely to need insurance for the rest of their life, or if their health is likely to worsen, making it harder to find insurance.

How much life insurance do I need for my special needs child?

The amount of life insurance coverage you might need depends on a number of factors. If you are purchasing a policy primarily to have insurance in place in case your child’s health worsens in the future, you may be fine with a smaller policy. That may also be the case if you have financial constraints and are unable to afford high premium payments each month. In that case, a term policy may be preferable, with the option to convert it to permanent insurance before it expires (check with your insurance agent to ensure you understand when the conversion must happen for your policy).

Permanent insurance, with its promise of a payout that lasts as long as the premiums are paid, is also a sound option. The policy’s cash value can be a valuable benefit if you find yourself needing money for medical or other expenses, although it will reduce the death benefit if not paid back. In the end, it can be useful to talk to a licensed life insurance agent, who can help you determine the best insurance option for your own circumstances.

What are other options for parents of special needs kids?

If you prefer not to purchase life insurance in your child’s name, there are other financial options that can help you protect them and your family, no matter what the future holds for your special needs child. Consider these methods to ensure that your family is protected and will be cared for:

Child rider

If you aren’t able to buy a policy for your child, a child rider could be a good option. This is an addition to your own life insurance policy, where you include your child for an extra cost. The coverage amount varies but is usually relatively low, often no higher than $25,000. Some companies also give you the choice to convert the rider to a permanent policy upon its expiration. If your current life insurance company doesn’t offer a child rider, you could consider switching companies to a carrier that does have this option.

Special needs trust

If your adult child is unable to manage their own finances, a special needs trust can be a good option. This is also known as supplemental needs trust and is meant for estate and insurance beneficiaries who cannot take care of their own funds. You likely need to work with a lawyer to design the trust and provide specifications on how the money should be used. You also need to assign a trustee and a co-trustee to manage the funds. Having the trust set up before getting a life insurance quote and purchasing a policy is not essential since you can change the beneficiaries at any time.

Frequently asked questions

    • Maybe. Some states and insurance companies have laws and regulations about minors being beneficiaries and won’t allow it, but there are ways you may be able to leave your financial gift to a child. You could name your child’s legal guardian as the beneficiary, or you might choose to work with a lawyer to develop a trust.
    • There are no restrictions on how you use a death benefit payout. If you have a life insurance policy on your child and they pass away, you will receive the death benefit from the policy. You could use the money for funeral expenses, paying off bills, paying down debt or your everyday expenses.
    • Permanent life insurance policies, which include whole life and universal life, have a cash value component. The cash value in these policies grows with interest and provides living benefits, or aspects of a life insurance policy that can be used while the insured is still alive. You may be able to borrow against your cash value in the form of a loan. You might even be able to pull out the cash value without paying it back, although this will lower the death benefit.