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Special Needs Life Insurance: Navigating Your Options

June 01, 2023
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If you have a loved one with special needs, it’s critical to secure their financial future as soon as possible.

There are several special needs life insurance, trust, and savings account options to fit your unique circumstances and financial goals.

Be careful though; establishing too many financial assets in your loved one’s name can make them ineligible for government benefits.

To help you find the ideal solution for your situation, we’re taking a deep dive into three different options for special needs planning, their impact on government benefits, and suggestions for next steps.

Table of Contents

Life Insurance for Parents of a Special Needs Child

Your loved one with special needs may outlive you. Buying life insurance to cover your own life is crucial to their long-term health and happiness, especially if they need lifelong support.

There are two types of life insurance: term and permanent.

Term Life Insurance

Term life insurance is straightforward, affordable, and temporary. It’s by far the most popular policy option because it provides basic coverage that meets most needs.

It’s is designed to be simple, which is also why it’s so inexpensive; no frills, just the essentials.

How term works:

  • Determine how much coverage you need
  • Choose how long you want it to last (10-40 years)
  • Designate beneficiaries and inform them
  • Pay your premiums on time
  • If you die while the policy is active, your beneficiaries get a payout

Permanent Life Insurance

Permanent life insurance is complex, expensive, and lasts your entire life.

The high price tag is due to the lifelong coverage and cash value feature included on select policies

Whole and universal are the only two that build cash value. When you make a payment on these policies, some goes toward the death benefit and the rest goes into a separate account where it accrues interest over time.

Once the account has accumulated enough value, you can use those funds however you wish. The policyowner is the only one with access to the account and if you don’t spend it before you die, the insurance company absorbs the profits.

If you have a child with special needs, the higher price tag may be worth it. Moreover, there are various permanent life insurance options with different benefits and pricing — guaranteed universal is generally the most affordable.

How permanent works:

  • Determine how much coverage you need
  • Designate beneficiaries and inform them
  • Pay your premiums on time
  • If applicable, use of the cash value through policy loans or withdrawals
  • When you die, your beneficiaries get a payout

Learn more about the benefits of life insurance for families and its different uses.

Life Insurance for Individuals With Special Needs

Adults with special needs may be able to get term or permanent life insurance on their own. It depends on the individual situation.

Child Policy Riders

Adding a child rider onto your life insurance policy is the most affordable way to get life insurance on a child with special needs. It’s an optional add-on available for most policies.

The benefits of child riders include:

  • One rider covers all of your children, even those born after you buy it.
  • Costs are low, only a few dollars per month.
  • Coverage amounts typically range $10,000-$25,000 per child.

Medical Requirements and Options

Most insurance companies ask for a medical questionnaire to be completed on each child eligible for coverage and may exclude children with special needs or a disability. However, there are a few companies out there that offer child riders that don’t require any medical information. 

Additionally, a child rider can be converted into a standalone permanent life insurance policy when your child becomes an adult without requiring evidence of insurability. This is incredibly beneficial since many individuals with special needs would be uninsurable for their own life insurance policy.

Questions? Talk with our experienced advisors.

Protecting Government Benefits

Many people with special needs qualify for government benefits such as Medicaid and Supplemental Security Income (SSI). However, these programs are needs-based.

If an individual has too many assets in their name, they can become ineligible for these benefits, or their benefits may be reduced.

For example, if you buy life insurance on yourself, do not name your loved one with special needs as the policy beneficiary. Instead, you could use a trust.

Special Needs Trusts

A trust is a legal vehicle for asset management on behalf of a beneficiary. A special needs trust, specifically, is an irrevocable trust that holds assets that supplement benefits received from government programs.

An irrevocable trust becomes owner of each contribution immediately upon transfer; it cannot be taken back. Donations are final.

When putting assets for your loved one in in a trust, avoid naming them as the owner or direct beneficiary — the death benefit could disqualify them from needs-based government benefits (i.e. Medicaid and Supplemental Security Income).

By naming the trust as beneficiary, you can ensure your loved one’s government benefits are protected.

A trust can also own the life insurance policy. Trust-owned life insurance is a common estate planning tool for individuals with large estates. It’s a way to avoid paying estate taxes.

The benefits of using life insurance to fund a trust:

  • Cost effective – provides a large sum of money for comparatively low premium payments
  • Typically protected from creditors
  • Death benefit is income and estate tax free if properly structured
  • Can easily distribute proceeds between care for your special needs loved one and any other children or family members you wish to financially protect
  • Brings peace of mind that your loved one will be cared for even after your death

How Does a Special Needs Trust Work?

The assets held in the special needs trust (SNT) are managed by a designated trustee. The trustee can be a family member or friend. Or parents may use an independent trustee, such as a lawyer or bank official.

The individual should not use the funds to pay for things that the government benefits cover. Medicaid and Supplemental Security Income (SSI) provide for a person’s basic needs of shelter, medical care, and food. Needs outside of these can be paid for with the trust funds.

If discovered using these funds for necessities and the payments are reported so Social Security, the individual’s benefits will be reduced.

Avoid doing this at all costs. The trustee needs to pay close attention to how he or she is using the funds on behalf of the person with special needs.

Types of Special Needs Trusts

There are two types of special needs trusts: first-party SNTs and third-party SNTs.

First-Party SNTs

Also called self-settled special needs trusts, these are funded with the special needs beneficiary’s own assets. For example, if the beneficiary has a job, earned income can be placed in the trust. If the beneficiary receives an inheritance, the money can be placed in the trust.

Self-settled/first-party trusts are also “payback” trusts. This means that after the beneficiary dies or the trust is terminated, any remaining funds left in the trust are used to “pay back” the government Medicaid program up to whatever amounts were paid out for the individual’s care.

Because these SNTs are payback trusts, it’s not advisable for parents, friends, or other family members to contribute to it. This is when a separate third-party special needs trust comes in.

Third-Party SNTs

Also called supplemental special needs trusts, these are created by and funded with the assets of someone other than the person with special needs. Third party SNTs are not subject to the payback rules.

ABLE Accounts

The expenses that come with managing a trust may not be feasible for families with limited assets. To meet the needs of more families, Congress passed the Section 529A Achieving a Better Life Experience (ABLE) Act.

Benefits of having an ABLE account include:

  • Allows tax-free growth on after-tax contributions
  • Will not disqualify an individual from receiving benefits

Essentially, an ABLE account is a tax-advantaged savings account for individuals with disabilities and their families.

How the ABLE Account Works

Parents, grandparents, or other family members can create a 529A account for the special needs individual. Individuals with special needs may also open a 529A account on their own behalf.

To qualify, there are a few requirements:

  • The individual must have been diagnosed with the disability before age 26
  • The condition is expected to last 12 months or more
  • The individual must be receiving benefits under SSI or SSDI

Contributions into the account cannot exceed the annual gift tax exclusion amount ($17,000 in 2023). The account funds are not taxed when distributed as long as they are used for qualified expenses. Distributions used for non-qualified expenses will be taxed and fined a 10% early withdrawal penalty.

Qualified expenses include:

  • Housing
  • Education
  • Transportation
  • Employment training
  • Personal support services
  • Health and wellness costs
  • Legal fees
  • Finance management
  • Funeral and burial costs

If the 529A account total balance exceeds $102,000, the special needs individual will become ineligible for SSI benefits. Using distributions for housing can also disqualify individuals for some or all SSI benefits.

If the beneficiary dies before using up the entire balance of the ABLE account, the remaining funds are used to pay back Medicaid services provided to the beneficiary. This is unlike a special needs trust in which unused funds are able to be distributed to other named beneficiaries.

Most U.S. states have established an ABLE program, but not all. You may be able to set up an account even if your state does not yet have its own program. Many state programs allow out-of-state beneficiaries to open accounts.

Other Steps Parents of Special Needs Children to Consider

Create a Will

Your will specifies how you wish to distribute your assets after death. Without a will, a probate court judge, following state law, is likely to name your special needs child as a beneficiary of your estate.  Unfortunately, this is likely to make your child ineligible for government benefits. By writing a will, you ensure that your assets are distributed properly.

Name an Executor, Trustee, and Guardian

Selecting an executor for your estate, a trustee for any trusts, and a guardian for your special needs child is an important and often challenging task. In selecting these important people, keep in mind that the family member who may be best at handling administrative and financial matters after your death may not be the right person to supervise the care of your special needs child.

Give careful consideration to whether or not there is a family member who is willing and capable of caring for your child after you are gone. If need be, consider naming an agency that specializes in providing the services your child will need.

Apply for Guardianship or Power of Attorney

When children turn 18, they’re considered adults in the eyes of the law. This gives your special needs child the right to make medical and financial decisions.

If your child is not capable of making these decisions or needs guidance, consider assuming legal guardianship. A less restrictive alternative is to have a power of attorney and health care proxy for the child’s financial, legal, and medical affairs.

Write a Letter of Intent

A letter of intent lets you document essential information about your child, their needs, and how to meet these needs when you aren’t around.

Include a list that includes details, such as:

  • Medical contacts
  • Therapist contact
  • Any other support
  • Medications, their dosage & scheduling
  • Daily routine
  • Habits
  • Likes/dislikes
  • Important details

The more detail and information the better. The same goes for activities you want your child to maintain, and travel or enrichment you want to be sure continues.

Since this is an informal document, it’s easy to update as needed. Keep a copy with your will and make certain your child’s appointed guardian has a copy as well.

Educate and Communicate

Communicating with family members can avoid costly misunderstandings. Grandparents and other loved ones may want to make gifts to your special needs child, but well-meant gifts can have adverse consequences. Explain to everyone the importance of not putting anything in your child’s name, not even in wills or as a named beneficiary.

It’s advisable to work with a financial planner if you have a special needs child. They can advise you on what financial products are best for your situation.

Get Life Insurance to Protect What Matters Most

When you work with Quotacy, you get your own agent to guide you through the application process and support you as a policyowner.

Because we are an independent life insurance broker, our primary responsibility is to advocate for you, which we take very seriously. Our agents don’t work for commission or engage in high-pressure sales tactics.

We have relationships with over 25 of the nation’s top carriers to increase your likelihood of finding affordable coverage.

If you’re looking for an unbiased, trustworthy partner to help you find your best policy at the best price, look no further. But don’t take our word for it, explore our reviews to see what our customers have to say.

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