Can I Use Life Insurance to Help Provide Financial Support My Special Needs Child?
Life insurance can be a bedrock on which to build support for a child in the future. A Farmers® agent explains some benefits of life insurance for parents of special needs children – along with ways to own them.
Quick Take: Life insurance for special needs children
● Life insurance can help you provide some future financial support for a child with special needs.
● Permanent life insurance, which can be in place for the insured’s lifetime1, is a product parents may want to consider.
● A special needs trust can help protect your child’s eligibility for other assistance.
● Trusts can also be designed to include special instructions for your child’s care.
● Work with an attorney or tax adviser who is experienced in establishing a special needs trust.2
Q. My daughter is autistic and requires my constant care and attention. I don’t know what the future will look like for her, but I’m sure she will require help from others. I know I need life insurance, but want to find a policy that will help financially support her care after I’m gone. Where do I start?
We posed this question to Christian Slayton, a Farmers Insurance® agent based in Albuquerque, New Mexico. Here’s what she had to say about how life insurance can help you support the financial future of your child with special needs.
A. I can’t say I know exactly how you feel, but I do understand what you are going through. I work with parents of children with special needs, and I know the toll it can take to be constantly worrying about what might happen to your child if you were no longer there to care for them. Finding life insurance coverage that works for you can help you establish some financial support for your child in the event of your death. You can even use life insurance to help build cash value to pay for future expenses. And there are a few other things to be aware of before purchasing life insurance for the benefit of an individual with special needs. Here are some of the questions I hear from customers.
“Should I consider term or permanent life insurance if I have a special needs child?”
As a parent to a child with special needs, you are probably primarily looking for a policy that will stay in place for your lifetime as long as you are paying premiums, so permanent life insurance may be a product worth looking into. With term insurance, the policy begins to increase in price significantly when each level premium period ends – say in 10, 20 or 30 years. Keeping a term policy after its level premium ends can become expensive. Permanent life insurance, on the other hand, stays in place throughout your lifetime as long as required premiums are paid. Additionally, permanent life policies have the potential to accumulate cash value over time, which you can borrow3 from during your lifetime. Because of these features, premiums for permanent insurance tend to be higher than for term insurance, but remain the same throughout the life of the insured.
There are generally two types of permanent life policies: whole and universal. Whole life policies have fixed regular premiums and universal life policies are designed to be more flexible, depending on the individual policy terms. With some universal life policies, it may be possible to change or skip regular premiums, or to increase the face value of the policy over time depending on the underlying cash value. Some increases will need underwriting approval and will increase the premium payment amount.
“So what happens when my special needs child gets a life insurance payout?”
One of the most important things to understand is how a life insurance payout can impact any public assistance or disability income your child receives or may receive in the future. Many special needs adults rely on government income to help cover their basic living needs, particularly if they are living independently with no loved ones to support them.
If you were to name your child as the beneficiary of your life insurance policy, meaning the child receives the proceeds of the policy after you die, it might impact the child’s eligibility for public assistance. Even a life insurance proceed of just $100,000 could make your child ineligible for financial aid. Additionally, Medicaid’s payback provision could require your child to repay the government for assistance after a single lump-sum insurance benefit payment.
“That’s exactly what I don’t want. So is there a way to help support my child financially without hurting public assistance eligibility?”
You may want to consult an attorney to advise you and possibly help you establish a special needs trust for the benefit of your child. I am not an attorney, but it is my general understanding that this type of trust can be structured so that the life insurance proceeds are not counted as an asset.
The same is true for other financial gifts or contributions. You may want to let your extended family and friend network know about the trust you establish for your child. You could give them the option to have any gifts or inheritance being left to benefit the child be gifted to the trust rather than to the child directly.