Few things in life are more challenging for parents than caring for a child with special needs. Among those challenges is ensuring sufficient money is available to cover the cost of care, which often extends over the child’s life. The cost of care can be significant, including medical expenses, housing costs, special education, and therapies. The solution for many families is to set up a special needs trust.
That may be a viable solution for families with the means to fund the trust sufficiently. But for families who can’t save enough, a special needs trust could wind up being an empty legal vessel providing few benefits. However, they could bring the trust to life by funding it with a life insurance policy. The parents can purchase a policy on their lives, ensuring sufficient funds are available after their death to care for their loved one with special needs.
Life insurance is critical for any family after the death of a breadwinner to ensure the surviving members’ immediate cash needs are met and to fund long-term goals. The proceeds are available quickly and can be used for any purpose, including to support the care of a special needs child.
How Does Life Insurance in a Special Needs Trust Work?
Establish a special needs trust: To fund a special needs trust with life insurance, you first must establish the trust. An attorney specializing in special needs planning can help create the trust, which includes instructions on how the funds should be used for the beneficiary’s benefit while ensuring that it doesn’t interfere with their eligibility for government assistance programs.
Select a trustee: You must select a trustee to manage the trust and make decisions about disbursements on behalf of the beneficiary. The trustee can be a family member, a professional trustee, or a combination of both.
Obtain life insurance coverage: Purchase a life insurance policy and designate the trust as the beneficiary. It’s important to work with a special needs planner to determine an amount of coverage sufficient to meet the child’s lifetime needs.
Death benefit distribution: Upon your passing, the death benefit proceeds will be paid to the trust, and the trustee will have the authority to manage and distribute the funds according to the terms of the trust.
Trust distributions: The trustee will use the funds to supplement the beneficiary’s needs not covered by government benefits.
Other Life Insurance Considerations
In addition to working with a special needs planner to determine the appropriate amount of life insurance coverage, it’s essential to consider the type of policy that will best serve your and your child’s needs. Most planners will recommend permanent life insurance as the best option. Permanent life insurance is guaranteed to stay in force for the life of the insured as long as premiums are paid.
While term insurance is less expensive, it is only temporary coverage. That is, it stays in force for a specified period of time. If you outlive the term coverage, you run the risk of not being able to afford or qualify for a new term policy.
Another option for couples is to purchase a second-to-die or survivorship policy, which provides coverage on both lives. The policy will distribute death benefit proceeds to the trust following the second parent’s death. Survivorship policies are typically less expensive than purchasing separate policies for each parent.
Most importantly, purchasing life insurance when you’re young and in good health is essential to ensure you can qualify for the best ratings and lowest premiums. If you wait, life insurance costs increase with age, and you could develop a health condition that could increase your costs even more.
Other Legal Considerations
Working with an attorney experienced in special needs planning is essential to ensure the trust is carefully structured to comply with legal requirements protecting the beneficiary’s eligibility for means-tested government benefits. The trust must be coordinated with the parent’s wills and their state’s disability laws to ensure full compliance with benefit requirements. The trustee must make distributions in a manner that does not disqualify the beneficiary from receiving assistance.
An experienced attorney and qualified financial professional can guide you through the legal and financial aspects of setting up a special needs trust funded with life insurance, and doing so sooner rather than later can reduce your costs while providing much-needed peace of mind.
Working with a Special Needs Financial Planner
Here we’ve outlined one very viable solution for families to ensure the financial security of their special needs family members, but there are many other strategies we can use to protect your loved one financially speaking. Give our office a call today to learn more about our work with special needs families at 561-594-0100. Or, join our newsletter here to receive some of our free monthly resources.