Among the many challenges for families is making sure there will always be enough money to provide lifetime care for their special needs children. The costs are daunting: therapies, housing, medical care, and education, to name just a few. One way to plan for this challenge is to set up a special needs trust. Families of modest means may hesitate, thinking they don’t have the savings to put money aside in a trust. A solution for them is to fund a special needs trust with life insurance. In these instances, a parent will take out a life insurance policy on his life to ensure that once he passes away, sufficient funds will be available to care for the special needs child.
How does it work?
The trust is the beneficiary of the life insurance policy, so the funds from the death benefit go straight to the trust when the insured person dies. Because the trust has been set up for the benefit of the special needs person, the money pays for that person’s care and support throughout her life.
What are the advantages of funding a special needs trust with life insurance?
The purpose of life insurance, in any situation, is to provide immediate funds to a family when its main breadwinner dies unexpectedly. This will ensure that the surviving family members can meet their basic needs without exhausting their savings or going into debt.
Having sufficient cash flow is critically important to families with special needs children. Essential services such as therapies, housing, and medical care should never be interrupted, especially in the event of an unexpected death.
Additionally, the death benefit of a life insurance policy flows to the trust quickly and usually free of taxation. And the amount of the death benefit is guaranteed and delivered as cash (not securities or bonds), so it is not subject to the ups and downs of the stock market.
What are some other considerations?
When considering life insurance, consult with your special needs planner to make sure you are applying for enough in benefit. If your policy is too small and you encounter health problems later on, you run the risk of becoming uninsurable and won’t be able to purchase more.
Also, understand the different types of life insurance needed to fund a special needs trust. Larry Hawley, a financial representative with The Vermont Agency says, “While arguments can be made for funding a trust using permanent insurance, term insurance, and/or second to die life insurance policies, every family’s situation is different and must be carefully evaluated on a case by case basis. The determinant factors are varied and yours will be unique. The truth remains, however: families with specific special needs should transfer the risk of the burden of financial care to a life insurance company and place the special needs trust as the primary beneficiary. Your strategy may be to accumulate the funds necessary for your loved one(s) to survive without you, but if a tragic life event ends that effort prematurely, the insurance policy immediately fulfills the need. What you want to happen will happen even if you’re not around to see it happen.”*
Lastly, don’t wait! Perhaps your health is at its best right now, depending on your age and health. If so, now is the best time to apply, for the highest rating and lowest premiums. Your special needs planner can help you decide whether funding a trust with life insurance is a good investment for your family, and if so, how much.