Using Insurance to Fund a Special Needs Trust

Using Insurance to Fund a Special Needs Trust


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 will act as the legal entity separate from the child that will hold 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.  


What if you are not able to fund a trust with enough money to sustain your child for their lifetime?

As parents of children with special needs, you are well aware of the expenses that will be necessary for the continued happiness of your child. For example, Autism Speaks states that it can cost up to 1.4 million dollars the raise a child with an autism diagnosis, without an additional intellectual disability across the course of a lifetime and up to 2.3 million if there is an intellectual disability as well. These are some large numbers here. Of course, every situation is different, and that’s why developing your cost assumptions is integral to finding a solution.
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, but 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.
There are many types of useful insurance products including term, permanent, and hybrid or blended products. In many instances, insurance for special needs planning is structured in a survivorship policy, or a “second to die” policy as they can be called, which I will discuss later.
Let’s start with term life insurance since it 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, then the policy lapses and no coverage will exist after the term expires. Pretty straightforward.
Next, there are permanent life policies like 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 along the way from the interest collected on these accrued funds.  Universal life insurance is similar to a whole life policy in that value accrues throughout the life of the policy. The difference is that it allows policyholders to change premium and death benefits while holding the policy and are to be paid regardless of the age of death of the insured. One very useful insurance product for families with children that have 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 having two individuals insured separately, which in turn permits affordability of a larger policy. There can be an issue, however, if the first insured dies and the second insured does not keep up with premium payments.
Once you decide what type of policy you think best fits your situation, take the time to analyze how much insurance you will need to provide the sustainability and quality of life that you want for your child. We’ve covered some of the basics of insurance and how it can fund a special needs trust, but 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 the inherent conflicts of interest when these products are pitched by commissioned salespeople. In my post next week, I will cover the basics of how these policies are priced and sold so that consumers can maximize their coverage while minimizing their costs.
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