Life Insurance Planning for Parents of Children Living With a Disability

For parents of a child with a disability, long-term planning is essential to help create a secure future.
Georgia Rose
By Georgia Rose 
Edited by Caitlin Constantine

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Life insurance can help secure the financial future of a child whose functional needs may require ongoing assistance. But to ensure your child also remains eligible for important government benefits, you’ll need a good plan. Rest assured, if you’re in this situation and you’re someone who needs life insurance, you don’t have to do it alone. There are tools to help, and attorneys and financial advisors who specialize in assisting clients like you.

Here’s what you need to know before buying life insurance as the parent or guardian of a child living with a disability.

Calculate your child’s cost of care

  1. Identify the costs: The first step is to think about your child’s ongoing needs and estimate the costs of meeting them. Expenses might include medications, therapy, transportation, schooling or adaptive equipment.

  2. Estimate the costs over the child’s anticipated lifetime: Medical, transportation and living expenses can add up over time. The mean health care costs for an adult living with a disability are roughly five times higher than someone without a disability, according to a 2017 study by the University of Texas and Washington State University.

  3. Subtract government assistance: Government programs, such as Medicaid and the Children’s Health Insurance Program (CHIP) can help cover medical costs for a child living with a disability. Eligibility is often based on income and varies among states.

Once you’ve calculated the expenses associated with your child’s disability, subtract the estimated government benefits they’ll likely receive, and that’s the amount to plan on providing.

Choose the right type of policy for your situation

There are two main types of life insurance: term and permanent. Unlike term life insurance, which expires after a certain number of years, permanent life insurance, such as whole life or universal life, provides lifelong protection. As such, permanent policies are often recommended for parents caring for a child with disabilities, as the life insurance death benefit pays out regardless of when you die.

Survivorship life insurance, sometimes called second-to-die life insurance, is a type of permanent coverage that insures two people, typically a couple, under one policy, and pays out after the second person dies. These policies are often cheaper than covering both parents separately.

Set up a special needs trust for the child

If you name your child as the beneficiary of a life insurance policy or leave valuable assets directly to the child through your will, you may disqualify them for government benefits, like Supplemental Security Income. This is because people living with disabilities generally cannot have more than $2,000 of assets in their names to be eligible for government benefits.

But you can provide life insurance benefits for the child and still preserve eligibility for government programs by setting up a special needs trust, sometimes called a supplemental needs trust. The trust holds assets for your child, and the trust document spells out how the money should be used. You appoint a trustee to manage the money on behalf of your child, and name them — in their capacity as trustee — as the beneficiary of the life insurance policy.

The trustee could be the same person as the child’s guardian. Alternatively, you can appoint a relative, attorney or other professional to serve as trustee. It’s important to choose someone who is good with money and will implement your wishes effectively.

Plus, the trust can be used for any assets you want to leave your child, not just the insurance payout.

Get help from life insurance and special needs trust experts

General estate attorneys and financial planners may not understand all the nuances involved with planning for a child living with a disability or setting up a supplemental needs trust. Therefore, you may want to seek help from an attorney, financial advisor or life insurance expert with authority in this area.

You can find attorneys and other professionals through groups such as the Special Needs Alliance and the Academy of Special Needs Planners.

Besides helping you set up a supplemental needs trust, an attorney can help you write a will and draft a letter of intent, which is like a guidebook for caregivers.

If you want coverage for your child, look into child life insurance policies. While not right for everyone, these policies can act as investment vehicles for minors, and help secure future insurability when they reach adulthood.

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