Planning for Your Child's Future
As parents of children with special needs, we worry about what life will be like for them when we're gone. Who will take care of them? How will they pay for what they need? Creating a plan to finance their long-term happiness and security is paramount.
Like building a house, we start with a foundation. The availability of government benefits is the start of a solid foundation as they provide a safety net and support system. To protect these benefits, families often establish a special needs trust. The trust acts as a legal entity separate from the child that holds assets. Since the funds in the trust are essentially a separate entity and do not count towards your child's countable resources assessed for SSI, your child's benefits will stay out of jeopardy.
But what if you are not able to fund a trust with enough money to sustain your child for their lifetime? Understanding how to protect government benefits like SSI and SSDI becomes crucial in that scenario.
Understanding the Cost of Special Needs Care
As parents of children with special needs, you are well aware of the expenses necessary for your child's continued happiness. For example, Autism Speaks states that it can cost up to 1.4 million dollars to raise a child with an autism diagnosis without an additional intellectual disability, and up to 2.3 million if there is an intellectual disability as well.
These are large numbers. Every situation is different, and developing your cost assumptions is integral to finding a solution.
Using Life Insurance to Fund Your Special Needs Trust
Fortunately, life insurance can be an excellent tool to fund your child’s trust for their care after your death and provide the security you are looking to provide.
There are several different life insurance products available. Regardless of which one you decide to use, the commonality is that the child’s trust is the beneficiary of the death benefit, allowing them to maintain access to the much-needed government safety net.
Types of Life Insurance Products
There are many types of useful insurance products including term, permanent, and hybrid or blended products. When paired with a special needs trust, life insurance becomes a powerful funding mechanism. In many instances, insurance for special needs planning is structured in a survivorship policy, or a “second to die” policy.
Term Life Insurance
Term life insurance is the easiest to understand. With a term life policy, the insurer agrees to pay the designated beneficiary a set amount of money if the insured dies within a certain period. If the insured person lives beyond the term, the policy lapses and no coverage exists after the term expires.
Permanent Life Policies
Permanent life policies include whole life and universal life. A whole life policy usually lasts for the span of the insured’s lifetime, accumulating value along the way. It can also pay dividends from the interest collected on accrued funds.
Universal life insurance is similar to whole life in that value accrues throughout the life of the policy. The difference is that it allows policyholders to change premiums and death benefits while holding the policy. Payments are made regardless of the age of death of the insured.
Survivorship (Second to Die) Insurance
One very useful insurance product for families with children with special needs is “second to die” or survivorship insurance. This insurance pays out to the beneficiary when the second of two people insured in the policy is deceased. This type of policy typically offers lower premiums than insuring two individuals separately, which permits affordability of a larger policy. However, there can be an issue if the first insured dies and the second insured does not keep up with premium payments.
Next Steps
Once you decide what type of policy best fits your situation, analyze how much insurance you will need to provide the sustainability and quality of life you want for your child. Beyond housing costs and other major expenses, consider how factors like housing arrangements can affect SSI benefits. It’s always a good idea to contact your fiduciary special needs financial planner to discuss options to aid you through this process.
There are tricks and traps to using life insurance to fund a special needs trust, including inherent conflicts of interest when these products are pitched by commissioned salespeople.
Comprehensive special needs planning integrates insurance funding with your complete financial picture. To explore how life insurance fits into your family's special needs financial planning strategy, contact our team at FamilyVest or start a conversation with us.
