Financial planning for any family is complicated, but the challenges rise to a new level when a child has special needs.
"Parents are not only planning for their family's needs and retirement, but for well beyond their lifetimes," said Linda Hunter Suzman, a special care planner with MassMutual Financial Group in Seattle.
Schimri Yoyo, licensed life insurance agent and financial advisor, said parents of children with special needs have more responsibilities for caring for a child. That can include life insurance policies to help finance a child's lifetime care.
“It's crucial for parents and caregivers to consider all appropriate life insurance options and benefits when making a plan for the care of their children. The proceeds from permanent life insurance provides tax-free financial support, which helps families to maintain their current lifestyle. The policy’s cash value can offset current and future costs of raising your child with special needs, and it grows tax-deferred,” Yoyo said.
The process, including buying life insurance policies, is fraught with legal considerations. Well-meaning parents who name children as beneficiaries on their policies put them at risk for losing eligibility for government assistance. Under federal law, anyone who receives a gift or inheritance of more than $2,000 is disqualified for benefits, such as Supplemental Security Income (SSI) and Medicaid.
That's why assembling a team of trusted financial advisers is critical, including an accountant, attorney and life insurance agent who specialize in helping families like yours.
Long-financial planning for a special needs child
Planning the financial future for a special needs child can be quite different than for other children.
The situation first takes clarity for what you want.
Denise Hagan at Northwest Mutual Wealth Management Advisor suggested parents get the answers to these questions:
- What level of care do you want for your child?
- What quality of life do you want your child to have when you’ve not able to care for them? Why is that important to you?
- What resources do you already have that you can use now and in the future?
- What are the obstacles you face?
- What are the gaps in your current situation that would prevent your plan from working?
Once you’ve answered those questions, Hagan said you can create a financial strategy.
“This plan should be written so that it is founded in reality instead of wishful thinking. It should be customized to your situation. A written plan can be transformational. It gives you confidence in your decisions and it reduces stress in an already stressful circumstance,” Hagan said.
Earl Rubinoff, president & CEO of The Rubinoff Group in Deerfield, IL, said a plan needs details in the event of the guardian’s death. That includes:
- A specific team of caregivers
- Enough money for living expenses for the child
- A trustee to manage the expenses and money for the child
Setting up a trust
How best to buy a life insurance policy or create a trust for a child depends on the situation.
Hagan gave the example of a couple with a special needs adult child, who sought lifetime care.
“For them it made sense to set up a survivorship life insurance policy inside an irrevocable trust to avoid creating an additional estate tax liability. When they pass, the survivor benefit will fund a special needs trust. By setting this up properly, they were able to avoid many pitfalls. The proceeds will be income- and estate-tax free. None of the money will compromise their child’s government benefits and the funds are contractually guaranteed so there are no worries if the stock market tanks,” Hagan said.
Yoyo suggested that parents and guardians consider a special needs trust. The trust will “avoid any interruption in their children’s federal benefits.” That includes the child being disqualified for receiving SSI benefits.
“By establishing such a trust that is initially funded by a whole life insurance policy, parents can appoint a trustee to access and distribute the funds necessary to pay for the ongoing costs of health care and quality of life of your special needs child. The monetary gifts, including inheritances, that are given to the trust will not disqualify a child with special needs from receiving federal assistance,” Yoyo said.
An attorney can help you set up a special needs trust. A trust is an important tool if you think your child will require government help. A special needs trust holds assets for your child, and can be named as a beneficiary for life insurance. A trustee, usually a family member, distributes money to take care of your child. When set up properly, a special-needs trust provides money to maintain your child's quality of life and preserves eligibility for government benefits.
Michael Lucy, principal at 3V Business Solutions, said a trust is critical for “asset protection and protecting any benefits from creditors,” including the IRS.
“Just as important as a trust is a letter of intent, or sometimes referred to as a Letter of Instruction or just LOI, which lists how the funds should be used and dispersed. The general purpose of insurance, trusts and LOIs,” Lucy said.
Zhaneta Gechev, founder at One Stop Life Insurance, said parents who are both taking care of the child should name the other parent as a primary beneficiary and list a special needs trust as a contingent beneficiary.
“That way, should your spouse die before you and you didn't update your policy, when you pass away, the money would be payable to the trust,” Gechev said.
If there’s one parent caring for a special needs child, Gechev said it’s vital to meet with an attorney and create a special needs trust. You would list the trust as the policy’s beneficiary. You’ll also want to make sure that the policy won’t hurt the child’s social security benefits later.
Avoid generic trusts
The trust shouldn't be generic or inflexible, but designed specifically for your child, says Deidre Wachbrit Braverman, a special needs estate attorney in Boulder, CO.
Braverman, whose brother has severe autism, speaks from experience; she helped her parents set up a trust. She recommends working with a special-needs attorney -- not just an estate attorney. The Academy of Special Needs Planners provides a search tool to find attorneys. She also recommends finding a knowledgeable life insurance agent.
Life insurance plays an important role because most families cannot save enough money for their children's lifetime needs, and the coverage provides security in case a parent dies prematurely.
A growing number of life insurance companies have established units for special-needs planning. MassMutual started its SpecialCare program with The American College in Bryn Mawr, PA, to develop coursework and the Chartered Special Needs Consultant designation for agents who complete the schooling.
MetLife launched its Center for Special Needs Planning more than a decade ago upon the urging of an employee, a parent of special-needs children. The program provides training for agents and resources for families. More than 80% of the people who work in it have a family member with special needs.
Term or whole life?
Term life insurance is an option for most parents. Gechev said parents usually get term life policies that cover the years before their children become financially independent. However, a parent of a special needs child may need longer coverage.
“Chances are that the kids would remain in the care of their parents even when they are adults. This is why it is absolutely crucial to share the information with your insurance agent. You want to ensure that there would be covered on you beyond the child's 25th birthday,” Gechev said.
One option is to stack life insurance policies.
“Simply put, stacking life insurance policies means getting several policies with different duration,” Gechev said.
Mary Hale, manager at Vantis Life Insurance, suggested that a whole life insurance policy is best for parents with a special needs child. That way, you’re assured that your child will receive benefits when you die. A term life policy could expire before you pass away.
“A whole life insurance policy is generally the type of protection that would make most sense. If that is too costly, then a combination of a whole life and term life would be the next viable solution,” Hale said.
Tips for using life insurance to plan for the future of your special-needs child
Suzman understands the stress on families because she's been there. Her son was diagnosed on the autism spectrum. She recommends the following insurance tips:
- Make sure you have enough individual disability insurance and long-term care insurance for yourself, so the family isn't strained if you become disabled or need long-term care.
- Invest in a whole life insurance policy to help finance your child's lifetime needs. Permanent life insurance also provides cash value, which you can borrow against in emergencies.
- Consider important riders, such as waiver of premium, which pays the premium if you become disabled; and a guaranteed insurability rider, which lets you purchase more life insurance later without undergoing a medical exam.
Lucy, who speaks from a perspective of both a life advisor and the brother of a 52-year-old sister with Down Syndrome, said two vital points are:
Ensure that legal guardianship is established as per the law in your state and also make sure to identify a substitute or backup guardian. This is extremely important to ensure continuity of life if something happens to the primary guardian.
Ensure the substitute or backup guardian is familiar with the process for managing funds, finances and benefits of the child. That includes Medicare and SSI.
Ira Starr, registered financial consultant, offered these considerations when planning for a special needs child:
- What kind of home environment or accommodations would you desire them to be in?
- What kind of education, resources or supports do they need?
- Are there any medical, health or dietary considerations that will need to be accounted for?
- Who will take on the responsibility of caring for the child? Will they have the emotional, financial, and physical supports needed?
- Most importantly, have you spoken to those individuals and have they agreed to accept responsibility for your child or children?
“With this information, you can begin to identify and quantify the financial requirements to support your child now and into the future. This knowledge will inform the base amount of life insurance to consider acquiring since each individual's circumstances are unique. I caution against generalizing a plan,” Starr said.
Hagan said planning is key. Without a plan, you can pay more and feel unnecessary stress and worry.
“For example, this particular situation was headed for disaster. A grandfather decided to help out his only grandchild who had cerebral palsy. He decided to name this child as beneficiary of his life insurance policy. When he died, his well-intentioned gift turned into a nightmare for his granddaughter’s family. The gift resulted in disqualification for the state and federal benefits the child had been receiving. That forced the child’s mother to come up with other funds to replace what was previously provided by the government,” Hagan said.
Next, Hagan suggested creating a customized plan and talk to an expert. Rules change frequently, so it’s vital to get an expert to help and avoid unintentional mistakes.
“Getting the right advice can make the difference between having enough resources for your child to be cared for in the manner you choose or not and possibly being shunted into whatever underfunded state-run program may be available at the time,” Hagan said.
Planning can give parents the peace of mind that their child will be financially OK and taken care of after they’re gone.
“There are many techniques to leverage assets so that people can avoid taxes and make sure the resources are there to care for their child. When it’s done correctly, the impact is phenomenal,” Hagan said.
Barbara Marquand contributed to this report.