Taking into consideration the future care of their special needs child requires parents to take on unique responsibilities. Funding a special needs trust (SNT) with life insurance is one of the most important things you can do to provide additional monies while protecting eligibility for government benefit programs. Life insurance policies provide special needs families and their children comfort and security. If families experience future financial setbacks (one or both parents die early, lessening wealth accumulation), money will still be available for their child’s future.
Special needs trusts have many benefits. For instance, in most places, they are not subject to the probate process. Aside from the public exposure of probate, the biggest benefit in is saving time. Probate can last for years, yet a life insurance policy in an SNT will provide funds immediately because of the death benefit. Ordinarily, this benefit payout is in one lump sum.
Preserving Government Benefits
More importantly than quick access to cash, a special needs trust can protect your child’s eligibility for government benefit programs. Millions of Americans with disabilities (including special needs) rely on Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) assistance programs. An SNT protects an insurance policy payout for the child’s benefit, whose assets generally should not exceed $2,000, thereby not affecting critically valuable government federal or state benefits. Although the regulations can get very complicated, a special needs attorney can assess and guide your situation when creating a special needs trust.
Why Fund and SNT with Life Insurance?
Funding your SNT can happen as often as you choose to place assets in the trust. However, younger families often lack the resources to save for retirement, college, home, and fund an SNT. Funding a special needs trust with a life insurance policy ensures there will still be money for your child even if you did not live long enough to grow savings. If parents live longer and assets are accumulated in an estate, the SNT frees them up to direct the remaining assets of their estate to other children. Assets inside of the SNT are only for the beneficiary’s supplemental needs. The rest of the family can’t access the trust’s benefits.
How Much Life Insurance is Adequate to Fund the Trust?
There is no one answer other than to be aware that the value you choose ties directly to your special needs child’s future quality of life. Financial help organization debt.org estimates the lifetime care cost for a child with special needs in 2022 runs between $1.5 to $2.4 million depending on their disorder or congenital disability. Speak with your child’s physician to accurately predict health care needs now and in the future because every child’s prognosis is different. As difficult as it is, you need to assess your child’s probable lifespan, whether their condition has a high mortality rate or perhaps their condition is deteriorating.
When you have a clearer idea of their medical situation, apply this information to considerations about where the child will live and the associated costs. Perhaps your child can live independently, but if they will require special care attendants, a special care medical facility, or a group home, these costs factor into your funding determinations. Remember that costs change over time and will never go down, particularly since medical care and housing tend to increase faster than other goods and services. Additionally, inflation degrades the dollar’s valuation. Major life transitions from school to adulthood also affect costs. Your special needs attorney can recommend a financial planner that makes these sorts of assessments.
What Type of Life Insurance is Best?
Clearly understand the purpose of the policy you want to fund the SNT. The insurance world is rife with sophisticated marketing, and agents understand how to inflate premiums and policy complexity by adding riders you may not need. A rider is an optional feature or coverage you can add to a life insurance policy, most often for an additional cost. It is easy to add the bells and whistles of riders that seem beneficial but may not suit the clear purpose of the special needs trust. It is best to consider purchasing insurance as a hedge against a loss and provide income replacement. Keep your purchase simple and focus on the basics.
Term life insurance is a straightforward insurance policy type. Coverage is a defined time period, normally the time in which premiums are paid. The term policy benefit pays when the policyholder dies within the period covered by the policy. Premiums tend to increase yearly as the insurer ages, or the policy has a level of 10, 20, or 30 years. If your child’s prognosis is poor or their life expectancy likely will not exceed the end of the term, term life insurance is an appropriate choice. You can explore a convertible term or return of premium term options if your financial professionals or special needs attorney advises it.
A permanent life insurance policy will last the policyholder’s entire lifetime and provides protection in the form of cash value and death benefits. Permanent life insurance has many subsets, including whole life, universal life, and variable universal life. Typically these policies are cost-prohibitive and have high lapse rates. Funding an SNT with permanent life insurance requires realistic plans to cover premiums through your remaining years of life, or you will waste the money.
Survivorship life insurance is ideal for funding a special needs trust. Survivorship or second to die policies are joint permanent life insurance paid out upon the last parent’s death, presumably when the child most needs the money. This insurance type is almost always less expensive than insuring the same two parents with individual policies. The downside is that a surviving spouse will not receive any policy benefit because the benefit is exclusive to the protection of your special needs child. A separate term insurance policy can help a surviving spouse, covering the difference in incomes, and maintaining their ability to support the child.
Types of survivorship policies can include:
- Survivorship guaranteed universal life (GUL) – This policy is a hybrid of term and permanent life insurance offering the best features of both and can be a good choice to fund an SNT. GUL pricing is similar to term life insurance as there is no cash value accumulation. A downside is inflation’s inevitable erosion of the death benefit value, which should factor into your determination of the insurance amount. Also, a GUL policy is inflexible. It may affect your guarantee if you do not pay the full premium after a grace period or skip a payment altogether.
- Survivorship whole life – This policy is more expensive than a GUL but has additional benefits and more flexibility. Part of the whole life policy has a cash value component that grows in time based on a dividend rate. In some cases, the cash value can become sizeable, which makes it attractive as an SNT funding mechanism. The cash value is one way to account for inflation eroding the death benefit’s purchasing power. The cash value can also help policy owners nearing retirement and needing the cash flow to continue paying premiums. Lastly, if you outlive your special needs child, a whole life policy will return the cash value to the policy owner to offset premiums paid throughout the years.
The insurance world is complex, and there is no short answer regarding the best way to fund a special needs trust with life insurance. Reviewing options with your special needs attorney and a financial planner with special needs expertise can identify the pros and cons of available options and how much funding your SNT needs. Your professional team can also help you find a reputable insurance agent so that the product you purchase will best meet the needs of your family and the trust requirements.