Life Insurance for Children With Special Needs

Although raising a child with special needs can be tremendously rewarding, you may worry about their financial stability if you are no longer around to care for them. Or you may wonder if you should have a policy where they are the named insured, to financially protect yourself if the worst should happen. Life insurance for children with special needs is available from some insurance companies. It can be a good idea to work with a financial professional when purchasing coverage, especially if you need to ensure that it will not impact any needs-based government benefits your child receives. Bankrate’s insurance experts review what you need to know to have the right insurance for your child with special needs.

Life insurance for parents of children with special needs

Life insurance can be a valuable component to any family’s financial plan, especially when there are young children involved. If a financial provider or caretaker passed away, life insurance could pay for education, a mortgage or other debts. Knowing the right type of coverage, however, can be challenging. There are two main types — term and permanent — each offering different lengths of coverage and benefits. Term, as the name suggests, lasts for a specific number of years, while permanent types of insurance are designed to provide coverage throughout your life (typically up to a maximum age of 95 to 121), as long as premiums are paid.

In most cases, it is not wise to name a minor child as a direct beneficiary of your life insurance policy, especially if they receive benefits such as SSI or Medicaid. A death benefit payout could leave them ineligible for the services they receive. A better option may to be create a trust in their name. 

Using a special needs trust

One of the best ways to protect your child’s assets may be to create a special needs trust to act as the direct life insurance beneficiary. Sometimes referred to as a supplemental needs trust, this is an irrevocable trust that allows a trustee to manage funds that are intended for the benefit of a person with disabilities. In most cases, it preserves their eligibility for needs-based government benefits.

Life insurance for your child with special needs

In some cases, life insurance for a child with a disability or special needs may not be possible. Depending on their medical history, they may not qualify for a policy, or there may be restrictions, and it can be prohibitively expensive, as well. Working with an experienced financial professional can be vital to protect your interests and those of your child while also ensuring that they have the protection they will need.

Protect the child’s insurability

When a child with special needs grows up, their medical issues might make it difficult or impossible for them to get life insurance coverage should they need it. If a policy can be found, it could be costly. Purchasing permanent life insurance for your child at a young age, if available, could help ensure that they are able to stay covered as they grow up. In fact, newborns may be automatically eligible for coverage up to a certain age, so getting coverage while your child is a baby could be a good purchase.

Provide for funeral expenses

Funerals can be costly. No one wants to think about their child’s funeral expenses, but planning ahead can save you from financial struggle if the worst happens. Life insurance policies pay a death benefit after the insured passes away. This can be incredibly helpful for parents, as the death benefit could cover funeral expenses and also allow time to grieve without worrying about money.

Types of life insurance for children with special needs

One of the decisions about life insurance for parents of a child with special needs is what type of policy to purchase. There are two basic types of life insurance: term and permanent. Permanent insurance has a number of subcategories, including universal life, equity-indexed universal life, whole life and variable life. The best choice for you depends on the unique circumstances of your family and needs. Both term and permanent policies are designed to pay out a death benefit to beneficiaries if the named insured passes away.

Term life insurance

As the name suggests, term life insurance lasts for a certain number of years, usually between 10 and 30, after which the policy is no longer active unless you renew the coverage or convert it to a permanent policy before the expiration date. Term insurance is generally the lowest-cost type of insurance. If your child with special needs will be able to support themselves financially in the future, it may be a good option. It’s important to note that term insurance cannot usually be purchased for minor children, so it’s a better option for those who are adults.

Permanent life insurance

Permanent life insurance is coverage that is meant to last for the life of the named insured as long as premiums are paid. It costs more than term insurance, but it has an added benefit: in most cases, a cash value accrues over time that can be borrowed against by the policyholder — although doing so decreases the death benefit unless paid back. 

A permanent policy may be the best life insurance if you’re caring for a child with special needs that is likely to need financial support throughout their life. It may also be the best option for your eligible child, if their health is likely to worsen, which may make it harder to get coverage in the future.

One option you may want to consider is guaranteed universal life insurance, which is generally one of the cheapest options for permanent coverage. Although this type of coverage doesn’t come with many extras, it does offer guarantees, as the name indicates, with a fixed premium and little volatility. 

Child life insurance rider

Because there are often challenges in purchasing life insurance for children with special needs, you may want to consider instead opting for a child life insurance rider on your own policy. In this case, there may be little, if any, medical underwriting for the child, meaning their medical status may not influence approval. This will vary from company to company, however, so be sure to ask your agent what is involved.

How much life insurance do I need for my child with special needs?

Once you have decided to purchase life insurance for the benefit of your child with special needs, your next decision is to consider how much coverage is adequate for their future needs and how much you can afford.

How much life insurance do I need?

The amount of life insurance coverage needed varies from person to person, and is based on multiple factors. These may include the following:

• How many children you have or are planning to have.
• Your financial obligations both now and in the future — mortgage, education and consumer debt, for example.
• How much coverage you can afford.
• How much financial help your child will need as an adult and throughout their life.
• What type of life insurance you’re considering.

Working directly with a financial professional may be helpful in determining the right amount of life insurance for you and your loved ones.

How much life insurance does my child need?

As we discussed earlier, it may be challenging to find a life insurance company that will approve coverage on an individual with special needs. However, not all special needs cases are the same, and neither are insurance companies.

Although the rates for whole life are typically higher than term, whole life insurance may be better specifically for an individual with special needs. Should their health deteriorate, you’ll have peace of mind that the coverage will stay in place as long as premiums are paid. In addition, permanent policies like whole life often accumulate cash value, which can be a valuable benefit if you find yourself needing money for medical or other expenses, although it will reduce the death benefit if not paid back.

Most term policies can convert into permanent life insurance, but you must do so before the conversion expiration period. Note that your rates are likely to increase with the new coverage.

When determining how much life insurance your child needs, you should consider what you can afford and the reasons for the policy. Is the policy primarily for end-of-life expenses? Will trustees or guardians need to be compensated? In the end, it can be useful to talk to a licensed life insurance agent or Chartered Life Underwriter who can help you determine the best insurance option for your circumstances.

In some cases, you may find that your child only qualifies for guaranteed-acceptance life insurance or policies with graded death benefits. These policies may have costs that end up outweighing their benefits, so it’s important to work with a knowledgeable advisor who can explain your options and help you make the best decisions for your family.

To find some real-world examples of individuals who have dealt with life insurance when they have a special needs child, we looked at online forum Reddit.com and found a query from the parent of a seven year old boy with cerebral palsy, asking about the best life insurance options for their financial future. Here are a few of the replies they received:

*The quotes and citations included on this page have been verified by our editorial team and are accurate as of the posting date. Outlinked content may contain views and opinions that do not reflect the views and opinions of Bankrate.

Other considerations for parents with a child with special needs

Life insurance for your child with special needs is only one way available to protect them financially throughout their life. Consider the following options that may offer you the peace of mind in knowing that your child will always be cared for, whether you are there or not.

ABLE Accounts

The Achieving a Better Life Experience (ABLE) Act has, since it passed in 2014, allowed states to create savings programs with tax benefits for individuals with disabilities. Distributions are tax-free and must be used for qualified disability-related expenses. Parents, grandparents and other friends and family members can contribute to an ABLE account without jeopardizing the individual’s government benefits. If your child with special needs is employed, they can also contribute these funds to the account, up to certain limits. Contributions to the account cannot exceed the annual gift tax exclusion. It’s advisable to work with a tax professional to help navigate the tax law intricacies.

Creating a will

It is hard to overestimate the importance of creating a will, even for those who do not have a child with special needs. For those who do, it is a vital way to ensure that your child’s financial future will be protected and, if necessary, that legal guardians can be assigned to the child. A well-drafted will can help avoid family conflict and give you peace of mind, as well as allow you to create a supportive structure for your child that will last throughout their life. You can use your will to be sure your assets are distributed according to your desires and to establish a special needs trust for your child.

Naming guardians and trustees

Next to a will, there can be no task as important for a parent of a child with disabilities than naming guardians and trustees for their child, especially if it is likely that the child will not be able to manage their funds themselves. Parents should give careful consideration to the person or persons they name to these important roles and make sure they have passed on any instructions necessary to be sure their preferences are respected.

Applying for power of attorney

If your child with special needs is not able to make medical and financial decisions for themselves, it is a good idea to apply for legal guardianship and power of attorney (POA) when your child turns 18. At that age, they are considered legally an adult, and without legal recourse, parents can no longer make decisions on their behalf. This may include financial, healthcare or educational decisions, among others. A POA or guardianship ensures that you are legally able to make the decisions that are in the best interests of your child.

Writing a letter of intent

Another step you can take on behalf of your child with special needs is a letter of intent. This document can help future caregivers understand how to provide the best care for your child if you are unable to. It can include personalized care instructions, legal or financial information and personal data about your child’s personality, preferences and needs. It can serve as a way to advocate for your child long after you are gone or unable to act on their behalf.

Frequently asked questions

• What can I use a death benefit payout for?
  

  There are no restrictions on how you use a death benefit payout. If you have a life insurance policy on your child and they pass away, you will receive the death benefit from the policy. You could use the money for funeral expenses, paying off bills, paying down debt or your everyday expenses.

• What is a cash value policy?
  

  Permanent life insurance policies, which include whole life and universal life, have a cash value component. The cash value in these policies grows with interest that you can access while still living in the form of policy loans or withdrawals, depending on the policy. The loan does accrue interest, which needs to be paid back at some point. If you die before the loan is repaid, the owed amount is deducted from the death benefit before being paid to your beneficiaries.

• Can someone with a disability qualify for life insurance?
  

  Yes, it is possible, but approval options will vary depending on the nature and severity of the disability, as well as the provider’s policies. It may be easier to obtain coverage if the disability is minor or well-managed, but some insurers offer policies that are customized to the needs of individuals with disabilities. Guaranteed-issue policies, which do not generally require medical underwriting, may be one option.