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Life Insurance Considerations for Special Needs Families

Life insurance can “keep the lights on” for a special needs child while keeping that child eligible for means-tested government benefits. 

I had lunch recently with one of the members of the advisory board of The American College MassMutual Center for Special Needs. As both a parent of a child with autism and a former financial services executive, she certainly understands the importance of life insurance as part of the special needs financial plan. She is also the CEO of an international nonprofit that arranges services for families supporting children with autism.

When she brought up the topic of life insurance, one remark in particular stuck with me. She said, “I have parents making $28,000 a year who come to me, and they have life insurance. If it comes down to paying the heating bill or paying their insurance premiums, they know the premiums are more important for their child’s future security.”

Regardless of family income, life insurance serves a crucial role in the future economic security of a person living with special needs. Here are five key questions for parents or caregivers of special needs children who are considering purchasing life insurance for the first time: 

1) How much is enough?

There really is no simple answer to this, as every family’s situation is different. Some considerations include the parents’ ages, their income, the child’s life expectancy, anticipated support from other family members, cost of living, other assets, whether or not the child will earn an income, and the projected cost of lifetime care. Life insurance funding a special needs trust for the lifelong care and support of a person living with disabilities will require a larger policy face amount than life insurance being used to support a spouse and children or fund an estate. That is because the insurance proceeds will be needed to pay for the cost of the child’s care throughout their entire lifetime. This is a contrast to normal family situations where the insurance may be required to fund a child only through several years of college. 

2) Who should be the beneficiary?

This may be the only easy answer: generally, the beneficiary should be a special needs trust. Under current federal law, anyone with more than $2,000 in assets becomes disqualified from most means-tested government benefits, including — and this is extremely important for persons with disabilities — Medicaid. By naming the special needs trust as the beneficiary of a life insurance policy, the funds will not be included in the calculations for means-testing purposes. In this way, the child can remain eligible for programs like Medicaid and Supplemental Security Income. Additionally, the drafters can designate a trustee to manage the funds on the part of someone who may be incapable of managing their own finances. 

3) Who should be the insured?

Here again, the answer varies. Often, if there are two parents, each should have a policy on the other, so that both parents are the insured of a policy. There are situations, however, in which the child with special needs should be the insured. It is unpleasant to think about, but this would be advisable when a child is not likely to outlive the parents. In this case, the proceeds from the child’s life insurance policy would be used to replace the parents’ lost wages, cover incurred medical costs and supply funds that may be needed to catch up on missed retirement contributions for the parents. A child living with disabilities likely will be ineligible for a range of life insurance products, namely any permanent policies. A term life policy, perhaps with a graded life benefit, may have to suffice. This is a particular area in which a financial advisor who is both knowledgeable about insurance products and sensitive to your concerns can make a tremendous difference in your making the right choice. 

4) What about my other children?

A skilled advisor will make sure to help you plan not only for your child with special needs, but also for your own retirement, for your estate and for your other children. Any well-structured plan will include life insurance policies that provide financial protection to all children. 

5) How much of a priority should this be?

Life insurance should be a very high priority for the special needs family. The costs of life insurance will increase, the longer the family waits. If you postpone this conversation too long, it may be too late. As my colleague mentioned, even for working families simply trying to get by, if a child with special needs requires financial protection, life insurance should be as high of a priority as paying the electric bill. That’s because, should a wage-earning parent die, the life insurance may be the only thing keeping the lights on for that child in the future.

By working with a knowledgeable and compassionate professional, such as an advisor holding the Chartered Special Needs Consultant (ChSNC) designation, parents and caregivers can make sure they are getting accurate advice from someone who understands their challenges and can help them avoid common mistakes. Establishing a special needs trust and using life insurance products as a funding source will be important steps in this challenging process. 

Adam Beck, Esq., is assistant professor of health insurance and interim director of The American College MassMutual Center for Special Needs. Adam may be contacted at [email protected] .

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