Parents of children with special needs have to consider how their children will be cared for after the parents' death. Who will care for them, how will they be cared for, and how will this care be financed?

A 2018 CDC report listed 61 million American adults as disabled -- that is one in four. Topping its list were those with mobility issues. Coming in second were those adults with cognitive disabilities.

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The report also found that the number of disabled adults increased in recent years while their income decreased, leading to wider disparities. This information would make any parent think about future financial decisions for a special needs child worry for their future.

Buying life insurance requires the same careful planning as other financial considerations. Under federal law, any inheritance of more than $2,000 can disqualify an individual from federal assistance. For example, Supplemental Security Income (SSI) could be reduced or canceled for up to three years if a special needs child receives an inheritance or life insurance benefit. Inheritances could also affect eligibility for state assistance programs.

But with careful planning, any worry can be turned into hope. For instance, setting up a special needs trust, also called a supplemental needs trust, can provide money for living expenses for your child without affecting any other assistance they may receive.

Key Takeaways

  • Life insurance can help provide for the long-term needs of special needs children.
  • You have to figure out how much money you need to leave for the child's care when figuring out insurance coverage.
  • A special needs trust is one way to provide for your child without it affecting government benefits.
  • Types of special trusts include third-party settled trust, general support trust and self-settled trust.

What coverages are offered by life insurance policies for a child with special needs?

When thinking about their long-term care of a special needs or disabled child, parents often consider life insurance. That is the support net once a loved one dies. It’s meant to take care of those left behind.

But it isn't the only option. As long as the policies are put into a trust, there are three main categories from which to choose without jeopardizing future benefits of the special-needs person.

There's term life insurance, whole life insurance and survivorship.

The least expensive option to insure both parents and that doesn’t expire is survivorship.

Next up in the less expensive category is term insurance. It costs less because it lasts for a set amount of years. If a parent purchases one but outlives the term, it will serve no benefit to the surviving special needs child.

The option that would be the most encompassing and available whenever either parent dies is whole life insurance.

And let's not forget parents and caregivers aren’t the only ones who can apply for and get approved for life insurance. Some companies, such as MassMutual, offer policies to individuals with disabilities, too.

Kelly Piacenti, ChSNC, head of SpecialCare with MassMutual, says her company was the first to offer life insurance to qualified individuals with Down syndrome, cerebral palsy and autism.

"Exclusively offered through our community of Special Care Planners (SCP) and Chartered Special Needs Consultants (ChSNC) across the U.S., these financial professionals have received extensive training and education in working with families with special needs, and many have a personal connection as either a caregiver, family member, or friend of a loved one with special needs," she said.

Piacenti says these policies are whole life with a $25,000 face amount. They include a premium payment over 12 years for insured people with these special needs who are ages 1 to 49.

How much life insurance for a disabled child do you need?

There's no simple formula to answer this question. You must go through a process and answer many questions to figure out how much your child needs.

  • How severe is the disability?
  • What type of care do they require on a day-to-day basis?
  • Is it nursing care or quality of life care or daily living tasks?
  • What government benefits will your child qualify for?
  • Are there other assets that will assist with the child's financial future?

Reach out to a knowledgeable professional to accurately estimate future costs. The Special Needs Alliance is an organization and attorneys that specialize in special-needs planning.

Keep these figures in mind: the U.S. Department of Agriculture estimates the cost of raising a typical child to the age of 18 is around $240,000. Autism Speaks estimates that amount jumps to more than $1.4 million when you figure in a child with an intellectual disability. These costs are exactly the reasons you need to start conversations about the future of your disabled child.

What are special needs trusts?

A special needs trust provides a means of enhancing an individual's quality of life beyond the basic care provided by government benefits. If properly drafted, proceeds won’t affect government benefits as funds are held by the trust.

Piacenti says a special needs trust may protect an individual with special needs' eligibility for government benefits while addressing their ongoing care and needs.

"In general, a trust is an arrangement by which property is held by one party (the trustee) to benefit someone else (the beneficiary). Different types of trusts suit different needs and may have different tax implications."

A trust that is made to benefit a person with special needs can receive assets -- and inheritance, a court settlement, and insurance claim, money gift, or life insurance proceeds. It can also protect current and future government benefits, pay for medical care, education, special treatment, entertainment and transportation, among others.

"There are different types of special needs trusts. You should work with an attorney that has experience in working with special needs families and creating special needs trusts," says Piacenti.

Types of special needs trusts

You may want to consider a special needs trust to help your child. There are three main types of special needs trusts.

  • Third-party settled trust: This is the most commonly used type of trust. It’s designed to qualify the individual for government assistance while the trust provides for quality of life, such as travel, a specially equipped van, or home health care or companions.
  • General support trust: This provides for all general support of the child and disqualifies him for any assistance.
  • Self-settled trust: This is a trust created by the disabled person with their own funds. However, if the disabled person also takes government assistance, the assistance must be repaid with assets left in the trust after the disabled person has died.

How to choose the right life insurance policy for a special needs trust

Not all types of life insurance may be appropriate for funding a special needs trust. Let’s compare the three options to create a special needs trust.

Term life insurance

Term life insurance is coverage for a set number of years, such as 10, 20 or 30 years. The longer the term life insurance policy, the more you pay in premiums.

Pro: Term life insurance is the most inexpensive way to insure a parent's life. It’s a good choice for short-term needs.

Con: The parent may outlive the term of the life insurance policy, leaving a trust short on funds. If you already have a term policy and need to fund a special needs trust, you could consider converting your term policy to whole life with the same insurer.

Whole life insurance

Whole life insurance is a type of permanent life insurance. You keep the policy for your lifetime as long as you make payments. This life insurance policy guarantees a death benefit. Whole life also has cash value, which allows you to tap into the policy while you're still alive.

Pro: A standard whole life policy could provide funds for a special needs trust no matter when the parents died. Universal life and variable universal life insurance are other types of permanent life insurance.

Con: The payout is usually much lower than term life insurance.

Survivorship life insurance (also called second-to-die)

survivorship life insurance pays out after the second spouse dies.

Pro: This type of whole life policy is less expensive than buying two separate life insurance policies on the parents.

Con: Surviving spouse doesn’t get a death benefit, so the survivor will not get a death benefit.

"Families with children with special needs may want to consider purchasing a survivorship whole life insurance policy with a death benefit sufficient to meet their child's future financial needs. Such policies, which are generally cheaper than two separate whole life insurance policies, cover two lives instead of one and only pay after the second policy owner (in this case,the second parent) passes away. Often, such life insurance policies are placed in a special needs trust," explained Piacenti.

How to buy life insurance for parents of special needs children

Fortunately, life insurers are becoming experts in special needs planning. Some insurers have established divisions to assist clients who have special needs children. The Hartford Financial Services, Merrill Lynch Financial Advisors, MassMutual and MetLife all have divisions for estate planning for special needs children.

Take these steps when looking to buy life insurance to help your special needs child:

Calculate costs. The first thing you need to do is figure out the costs associated with helping your disabled child. Don't forget to include daily expenses as well as long-term ones, such as medical, therapy and housing.

Subtract government assistance. After you've compiled the expenses, you want to subtract the government assistance for which the child may be qualified.

Reach out to the professionals for help. You may have a financial advisor already, but do yourself and your child a favor and find one with a background in special needs planning.

Research life insurance companies. After you talk with a professional, do some research on insurance companies, especially those focusing on policies that help special needs children. The more knowledge, the better for you and your child down the road.

Decide on the policy and coverage. You’ll want to choose the type of policy and coverage amount that makes sense to you and that you can afford.

Set up a special needs trust. Once you have decided on the total amount of coverage for the policy, and the type of policy, don't forget to set up a special needs trust as the beneficiary. If you don't, your child will be subject to an inheritance tax as well as the loss of federal benefits.

Where to buy life insurance for parents of special needs child

You can purchase life insurance through an insurance agent, broker, directly from a company and shop online. For instance, MassMutual lets parents buy policies directly. There is an entire division dedicated to special needs planning, including estate planning as well as disability insurance and other support.

You can find more options by checking out Insure’s Best Life Insurance Companies. AAA Life Insurance Company got the highest consumer rating. The company doesn’t have a dedicated department for special needs policies, but it is thorough and has a parenting section.

Mutual of Omaha and State Farm both have high approval rates, making it a good option for parents. While they’re not special-needs specific, they offer a variety of products that would serve a parent of any age well.

What else should parents of special needs children know?

The first concern any parent has about life insurance is the financial stability of their child with special needs after the death. However, it shouldn't be the only one.

A letter of intent can go a long way toward steering the way your special needs child is cared for after you are gone. It’s not legally binding but will serve as an important tool that provides direction for the future caregivers of your loved one with special needs.

"To help their families get organized and prepare for a time when they can no longer provide care -- whether temporarily or permanently -- it is important to create a letter of Intent… It should detail your loved ones' medical history, daily care needs, housing and services, as well as specific wishes and expectations as they relate to their future.

"It is a working document for the future caregiver to follow and should be updated regularly. There's no cost to create one and it can be thought of as a letter of instruction or a guide for future caregivers. This can help maintain the quality of life your loved one is accustomed to and deserves," said Piacenti.