If you have a child with special needs, planning ahead for his or her financial future—especially in terms of insurance—is complex. The reason is that every situation presents itself with a different set of circumstances.
Below, you’ll find an outline of a three-part process to help make it easier to develop a strategy that will work for your family.
Note: My assumptions are that you are married and that as long as you or your spouse is alive, you can continue to support the child.
1. Legal rights: The first components are the legal considerations and paperwork that you should complete to protect your child and yourself.
Seek an attorney: Since I am not a lawyer—and if you don’t think that’s important, I suggest you read the piece I wrote about caring for aging parents earlier this year—my help here will be minimal. My advice is to engage an attorney specializing in special needs planning, to ensure that you get the proper legal documents for your situation.
Get your documents in order: You will likely need a Will, Durable Power of Attorney, Healthcare Power of Attorney, Letter of Intent, and possibly a Special Needs Trust—which may be required to maintain Social Security disability income eligibility, both now and into the future.
2. Financial plan: The next step is developing a comprehensive financial plan for yourself and your spouse that incorporates the costs of caring for your child, both currently and into the future.
Determine degree of dependence: The financial planning process is one that needs to be closely coordinated with your risk management solutions. Start by determining the amount of financial support you’ll be able to provide to your child in the short-term, and in the future.
Assess the amount of financial assistance your child will need: This should include any financial assistance that you give to your child, the cost of education (if applicable), plus the cost of the things that you do for your child on a daily basis that would need to be provided in the case of your death. These include driving your child to doctor’s appointments, balancing his or her checkbook, grocery shopping, etc.
Keep building your assets: The greater the extent to which your child is financially dependent on you, the more important it is that your financial plan includes assets that will be able to provide that income not only now, but after your death. While you are in your highest income-producing years, it is imperative to build up as much assets as possible. After all, the future needs of your child are likely unclear. Prepare for a hurricane, and hope for a rain shower.
Calculate financial assistance into the equation: In your retirement planning, be sure to incorporate the amount of financial assistance that you are giving to your child now, and what you expect to contribute in the future. Again, this is a guessing game, but it must be planned for in some manner so that you can determine what your retirement budget will ultimately be, exclusive of income assistance.
3. Risk management plan (aka: insurance): Tough as it is, plan for the worst case scenario in terms of the amount of money you’ll need to save while you are working, then continue that plan into retirement, and also after your eventual death.
Break down the process into smaller steps: Plan for the amount you’ll need to pay for your child while you are alive, after you retire, and ultimately after your death.
Get your priorities in order: If you’re like most people, your number one financial priority is to protect your ability to earn money so you can save for your eventual retirement. That takes on special importance when you have a child with special needs because not only do you have to plan for your retirement, and your family’s financial well-being, you have to simultaneously manage the additional expenses of the child with special needs.
Be realistic about the amount of life insurance you’ll need: It becomes imperative in this situation that you have an adequate amount of life insurance to replace lost income for your family in the event of your premature death—and that you provide adequate resources, now and into the future, for your child with special needs as well. Most often this is accomplished by a fixed-period term life policy and adequate disability income insurance.
Income replacement and disability insurance: Life insurance is typically an income replacement calculation (number of years working, current income, interest rate, inflation, etc.). If you have a child with special needs, estimate that your disability income is at least 60 percent of your annual income. In retirement we normally look at a policy that pays on the death of the second spouse. For example, if the husband dies first, the insurance policy pays nothing; the policy pays when the wife dies. There are two good reasons for this type of policy: It is normally cheaper than insuring the life of just one parent, and when one of the child’s parents is alive they can manage to provide for the child in retirement assuming that they have planned adequately during their working years.
Keep your chin up.
Planning how you’ll take care of both the legal and financial needs of a child with special needs is difficult, but not impossible. With the right legal and financial guidance, you and your family will be able to enjoy life, knowing your future is as secure as you can make it.