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For families who have children with special needs — for example, a mental or physical disability — the question isn’t whether the parents should own life insurance, it’s how much they can afford.
Generally speaking, families with special needs are planning retirement for two generations — the parents and the child — because the child may not be able to earn income as an adult and support himself or herself.
Many of the families I work with need from $2 million to $3 million to cover expenses for their special-needs child throughout the rest of his or her life. These expenses may include paying for an advocate, additional therapies, medications and adaptive equipment over the estimated lifetime of their loved one.
Using $2 million as a goal, a family would need to invest at a minimum $21,000 per year for 40 years, assuming a 4% net rate of return every year. This is a very lofty goal and not realistic for many families.
A permanent life insurance policy, in which premium payments grow in value over time and are distributed upon the death of the policyholder(s), can provide the necessary security. But a $2 million permanent life insurance policy may also be out of reach because the premiums for permanent policies can be higher than many people can afford. However, there are options that can bring the cost down. One such option is a second-to-die policy with individual term policies for each spouse.
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Policy covering two people
A second-to-die policy is a life insurance policy that covers two people, and it doesn’t pay its death benefit until the second person passes away. This allows insurance companies to charge lower premiums, because the single payout does not occur until both insured spouses pass away.
The downside is that the surviving spouse does not receive any benefit from the policy, which puts the surviving spouse at risk of not being able to continue with his or her standard of living or not being able to support the special-needs child.
The way around this is to combine a second-to-die policy with an individual policy for each spouse. Term life policies, which provide a death benefit for a set number of years but are not permanent, are a more affordable option than permanent life insurance, which lasts until the policyholder dies and is guaranteed to pay out a death benefit to the beneficiary.
The term insurance would be used by the surviving parent to support the child, and when the second parent dies, the second-to-die policy would pay out for the disabled child.
The drawback to this strategy is that there would be no payout for the surviving spouse if the first spouse outlives his or her term policy. For this reason, it’s ideal if parents buy as much permanent coverage as they can reasonably afford, because permanent coverage extends to the end of life, guaranteeing that both the surviving parent and child would be provided for.
But a fair compromise — and one that is more likely to fit into the average budget — is a second-to-die permanent policy with individual term policies for each spouse.
Special needs trusts
When setting up the policy, pay attention to the beneficiary designation. The beneficiary of the second-to-die policy should be a supplemental needs (special needs) trust. The reason is that a special needs trust has provisions allowing the disabled individual to accumulate assets within the trust and not have them count toward his or her Supplemental and Security Income and Medicaid eligibility. If distributions from special needs trusts are used for food and shelter, however, those distributions may be counted toward the Social Security and Medicaid eligibility.
How much insurance you need and what type(s) to purchase are decisions best made by talking with a professional. It can be easy to lose sight of the bigger picture, so having an impartial point of view will help keep things in perspective, and will also help ensure that all your goals are identified, prioritized and addressed. Life insurance isn’t a perfect fix, but it can help you prepare for the future.