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Life insurance can help create a secure future for a child with special needs and give parents peace of mind.
Good planning is essential to avoid mistakes and preserve a child’s eligibility for important government benefits.
Rest assured, if you’re in this situation and are 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.
Evaluating the child’s needs
The first step is to think about your child’s needs and estimate the costs of filling those needs over his or her lifetime, keeping in mind that you could die at any time. Subtract the estimated government benefits the child likely will receive, and that’s the amount to plan on providing.
“Frankly, in many cases it’s going to make the need for life insurance very apparent,” says Virginia attorney and financial advisor Andrew Hook, a past president of the Special Needs Alliance, a nonprofit group for disability and public-benefits-law attorneys.
Indianapolis attorney Robert Fechtman, an alliance board member, says almost all of his clients buy permanent life insurance as a component in their estate plans.
“What they’re concerned with is, how do I provide for this child when there is not a lot of money around after my death?” he says.
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 and pays a death benefit regardless of when the insured dies.
Setting up a special needs trust
A big mistake to avoid is unintentionally disqualifying your child from government assistance. This would happen if you name your child as beneficiary of a life insurance policy or leave valuable assets directly to the child through your will.
To qualify for government financial programs, people with disabilities generally cannot have more than $2,000 of assets in their names. If their assets exceed the threshold, they lose eligibility for Supplemental Security Income, which is handled by the Social Security Administration, and Medicaid, the federal and state health insurance program.
You can provide life insurance benefits for the child and still preserve eligibility for government programs by setting up a special 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.
The trustee could be the same person as the child’s guardian, but that’s not necessarily the case. You may want to appoint another relative, attorney or other professional to serve as trustee.
“What if your perfect choice for a guardian is great with all the personal decisions but is terrible with money?” Fechtman says.
The choice of trustee is crucial.
“If you don’t have the right trustee to implement that plan, it’s going to be poorly implemented and you’ll get a bad result,” Hook says.
When you buy life insurance to benefit your child, you name the trustee and trust as the beneficiary. You’ll also want to review the beneficiary appointments on all your other policies and accounts to make sure they’re correct, Fechtman says.
You may want a team of professionals to help you plan — an attorney, financial advisor and life insurance expert. All of them should have expertise in special needs planning.
“A litany of errors” are possible if you don’t have good specialists on your side, Hook says. General estate attorneys and financial planners don’t understand all the nuances involved with planning for a child with special needs.
Consider working with a Chartered Special Needs Consultant, says Adam Beck, director of the American College MassMutual Center for Special Needs.
MassMutual partnered with The American College of Financial Services in Bryn Mawr, Pennsylvania, to create the designation and the center. Professionals who have earned the designation not only are insurance experts, but they also have been trained in the broad scope of practical and emotional issues involved with caring for a child with special needs. Many have children or close relatives with disabilities.
“Most families don’t realize there are people they can turn to who get it,” Beck says.
Besides helping you set up a special needs trust, an attorney can help you write a will and draft a letter of intent, which is like a guidebook for caregivers. “It expresses all your hopes and dreams for the child,” Fechtman says.
Don’t put off planning
Long-term planning may seem daunting, especially when daily life is demanding.
“You can become so overwhelmed just getting through the day to day, you don’t think about what’s going to happen when you’re not there,” Beck says.
But the end result of not planning could be devastating.
“The options in a crisis are always worse than if you had planned,” Hook says.