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Insurance Planning for Children with Special Needs

Insurance Planning for Children with Special Needs

June 06, 2022

I write this blog as a somewhat cathartic process for myself. My sister who had special needs recently passed away and that made me think of the proper planning that could have been done by my parents, but unfortunately for all concerned, was not. According to the 2019 American Community Survey the percentage of special needs children in the United States increased by roughly 10% from 2008 to 2019. Having a special needs child requires special planning to ensure that both the parent(s) and the child are properly planned for now and in the future. So this post will describe briefly the steps that should be considered when planning for a special needs child.

Whether you are a single parent or a two-parent family with a special needs child there are some planning techniques that are the same and some that are peculiar to your situation. All parents should have all of their legal planning done for both themselves and their children. This includes wills, special needs trusts, medical directives, financial (durable) powers of attorney, and health care power of attorney. While you are alive and taking care of your special needs child it is a simpler planning process as you can alter plans based on what is occurring in your respective lives and the amount of money available is based on your income and governmental provided benefits. The major planning for a special needs child comes to planning for what happens when you or your spouse pass away and are no longer there to provide for and take care of your child.

When planning for what happens when you pass away you need to try and estimate the level of care that your child will now and in the future. I can not stress strongly enough to err on the side of caution here and plan for the worst and hope for the best. There are only truly two ways to provide the needed finances for your child when you pass away, accumulate enough resources that can be used to provide for your child or have a life insurance policy that will provide enough money to provide for the future needs of your child. The plan of accumulating enough assets to provide for your child is not one that I would recommend. Mainly because if I set aside a portion of my assets to be used at my death that means that I will not be able to use those assets to help me with my retirement. In addition to that, I would need to have the target amount of money available immediately because none of us know when we are going to pass away.

Assuming that you have now decided that pursuing life insurance is the option that will work best for you, the question that now needs to be answered is how much and what type. The answer to how much is somewhat ambiguous as you are trying to estimate the amount of money that may be needed to provide for your child years out into the future. Once again, I would suggest that you err on the side of caution because I have never heard anyone say that I am worried about providing my child with too much money. Once you have decided on the amount the most difficult part comes, picking the correct policy structure for you or you and your spouse. This is where whether you are a single-parent, or a two-parent family will make a difference.

If you are a single-parent family the choice of policy is your typical permanent life insurance policy. Please note that I am suggesting you purchase some form of permanent insurance, not term insurance. While term insurance is certainly the most budget-friendly option, its limited duration makes it an unacceptable option for providing for an indefinite timeframe (which all of our deaths inevitably are). Once you decide that permanent life insurance makes sense then you will need to determine which type of permanent life insurance works best for you. Basically, there are five permanent life insurance options that you can choose from: whole life, guaranteed universal life, current assumption universal life, indexed universal life or variable universal life. All of these contracts have their pros and cons and should be discussed with your financial professional to see which option works best for you. Just know that the more guarantees that your policy has the higher the resulting premium will be because those contracts represent more risk that you are transferring to the insurance company.

The major difference between the two-parent scenario and the single-parent option is the policy type. Instead of a single life policy for the single parent the two-parent family normally uses a survivorship policy (also known as a last-to-die policy). The policy options for the survivorship policies are the same as the single life option. The survivorship will pay the death benefit on the death of the surviving spouse as opposed to the death on a single-life policy which pays the beneficiary when you die.

The beneficiary of the life insurance policy should be the same for both the single-parent family as it is for the two-parent family, the special needs trust. The special needs trust will take in the insurance proceeds and then the trustee will disperse the money in accordance with the trust instructions. Please note that you should take great care when selecting the trustee for the trust as this person(s) will have full power over the trust and its assets. I would suggest naming a sibling of yours or your child's, a trusted relative or a close friend. I would suggest that you take into account the age of the trustee that you are naming and their ability to fulfill the obligations of trustee at your death. I would suggest not having a bank or your lawyer be the trustee as I have personally seen this become very cumbersome to deal with due to the level of bureaucracy associated with this trustee designation.

This is a very, very rudimentary overview of the planning process for the special needs child. I am not an attorney (nor do I play one on TV) and suggest that you consult with an attorney who specializes in special needs planning and trusts. Once you have your legal documents in order then I would suggest that you consult your financial professional to design the life insurance policy that works best for your situation.

The guarantee of an insurance policy is backed by the claims paying ability of the issuing insurance company.

 Variable Universal Life Insurance frequently involves substantial charges for early withdrawals, loans & withdrawals can have a negative impact on cash values and death benefits, and policyholders may receive less than their original invested amounts. Before purchasing a variable universal life insurance policy, you should carefully consider the investment objectives, risks, charges, and expenses of the policy and its underlying investment choices. For this and other information, obtain the prospectus for the policy and the prospectuses (or summary prospectuses, if available) for its underlying investment choices from your registered representative. Please read the prospectuses carefully before investing or sending money.