Life Insurance for Special Needs Children: What You Need to Know

Parenting is a rewarding but challenging experience even under the best of circumstances.  But for those parents with special needs children, the task can be especially daunting.

Normal day-to-day living is defined differently and there are long-term care challenges that can leave even the best parents feeling functionally and financially overwhelmed.

But there are proactive financial steps you can take if you’re the parent of a special needs child.  You don’t need to be a part of the majority of parents who have not even written a will (62%), don’t have enough life insurance to cover a lifetime of need for their child (77%) or have not established a special needs trust (88%) based on a survey from a few years ago.

The good news is that it’s never too late to start taking actions for your special needs child’s financial future.

How Life Insurance for Special Needs Children Works

One of the first challenges facing parents who want to buy life insurance for their special needs child is that there is no uniform definition of what constitutes a special needs child.  Definitions vary from state to state and from life insurance company to company.

In lowest common terms, a special needs child is any child at any age who has little or no ability to financially provide or care for themselves because of a disability.

A disability is broadly defined as anyone with a physical, developmental of psychiatric impediment that can include conditions such as:

• multiple sclerosis​
• cystic fibrosis​
• congenital heart problems​
• spina bifida​
• cancer​
• muscular dystrophy​
• epilepsy​
• chronic asthma​
• other types of physical impairment
• autism​
• Down’s syndrome​
• a variety of severe behavioral issues or functional issues

​A child’s onset of special needs can occur at any age and for any reason. The primary defining criteria is that the child will need some form of ongoing care and financial assistance.

Can People with Special Needs Get Life Insurance? What are the Benefits of Having a Life Insurance Policy for a Special Needs Person?

It is possible to buy a life insurance policy for a special needs person.  Some agents may tell you that children with certain disabilities or health conditions cannot be insured.  But do not let this stop you from seeking the coverage that you and your family need.  More often than not, there are several options that are available.

Life insurance is typically purchased to act as income replacement when someone dies.  Most of the time, purchasing life insurance for a healthy child is not a priority for most parents.

However, if you have a child with special needs or a complicated medical condition, life insurance could make sense.

Life insurance can cover funeral expenses and allow time for a parent to grieve, removing the burden of how to pay for hospital bills at a time when you may need assistance the most.

You can add life insurance by carrying a child rider on your own policy.  It provides coverage of up to $25,000.  Specific premium costs will vary by carrier.  Some carriers may let you convert the rider to a whole life policy when the rider expiries, usually when your child turns 25 or you turn 65.

Another thing to consider is that a chronic medical condition may mean that a child may not be able to get life insurance as an adult, or it could be prohibitively expensive to do so.  Purchasing life insurance for him or her as a child is one way to ensure that they have some amount of insurance as they grow older.

Things to Be Cautious of While Purchasing Life Insurance

In most cases, the life insurance industry is driven by commissions, so you’ll need to find an agent or a broker that will put your interests first and above their desire to make more money off your policy.

Also, seek out someone who has experience in writing policies for people with special needs.  There are certain things to take into consideration and finding someone who already knows what to look for and how to overcome barriers to writing this kind of a policy is the person you need to work with.

You may also encounter agents who will tell you that a special needs person may not be insurable due to pre-existing conditions or disabilities.  Despite this, there are still a lot of ways to get coverage, such as requesting a rating, buying a graded life benefit policy or possibly buying a policy based on the functional level of the person you’re seeking to insure.

You may be tempted to downplay or even hide certain aspects of a special needs person’s condition.  Don’t do this.  You can frame these things in the most favorable way to help you get a policy, but keep in mind that you must be accurate and complete when describing any medical or psychological conditions.  The flip side of this is that you do not need to volunteer more information than is necessary.  If an insurance company wants more information or requires more tests, they’ll ask for them.

Because special needs minors often get Medicaid or other government sponsored benefits, they should not own the policy.  The cash value of the policy is a countable asset of the owner for purposes of Medicaid and SSI, programs that have very low asset limits.

The loss of these critical benefits could be financially catastrophic for the child and for you. As a parent, you may be the owner, as long as you do not have long-term care or estate tax issues, which could cause you your own set of financial issues to deal with.  You might consider having another child own the policy or set up a trust as the owner and beneficiary.

Another consideration is cost. The cost of premiums will vary depending upon whether the policy is “term” insurance or “whole life” insurance. There are pros and cons to both types of policies, and you should become educated as to what’s best for your personal situation.

Even though premiums may be higher, a whole life policy that guarantees coverage for the lifetime of a child will ensure continued coverage if health conditions deteriorate over time. If a child’s health is stable and not likely to deteriorate over time, then term insurance may be less risky.

Purchasing a Life Insurance Policy for Special Needs

• Applying and underwriting can vary by provider, but you will typically follow the same general process from application to approval.
• Pick a policy type. This is especially important when buying a policy for a special needs person.  Decide the type of policy you want and the features you’re most interested in as well as what the underwriting guidelines are for a special needs policy.
• Compare providers. After you’ve decided on a policy type, narrow down potential providers.  An agent can help you with this.
• Complete the application. Some companies allow you to apply for a life insurance policy online while others require you to meet with an agent over the phone or in person to start the application process.  Make sure you have full and pertinent information available ahead of time to complete the application.  Your personal information and medical information will be the most critical parts of the application form.
• You may need to complete a medical exam. Some providers require an in-person medical examination. An agent will help schedule the exam at a time and place that’s convenient for you.
• Application review. An underwriter reviews the application, medical history and condition information, and medical exam results before approving or denying a request for coverage. This process can take several days or several weeks, depending on the provider.

How to Save Money on Life Insurance for a Special Needs Child

There are several things you can do to save a few dollars when purchasing life insurance for a special needs child.

First, consider a graded life insurance policy.  A graded policy limits the amount of the death benefit paid out if the policyholder passes away within the first two to four years of coverage.  For example, depending on the policy, it may pay 50% of the face amount of the policy in the second year and 75% of the face amount in the third.  After the policy has been in effect for a specified period, the full death benefit is released when the policyholder passes away.

Graded life is for those who typically struggle to meet life insurance eligibility criteria because they have some type of disability or other condition that makes them more difficult to insure.  While premiums are typically higher than traditional life insurance, applying and approval can be easier.

You should also speak with an independent agent instead of a captive agent.  Captive agents are limited to offering products from one company while independent agents can offer policies from many companies.  That type of competition can drive down premium costs in your favor.

Also consider purchasing term life insurance instead of permanent life insurance.  Term life insurance only provides coverage for a specified period, but premiums are cheaper.  However, if you need coverage for a special needs child for the rest of his or her life, you may want the peace of mind in knowing that a permanent life insurance policy will be in effect for that entire time.

Each child and their situation are unique.  So, if your child has significant health conditions that are likely to worsen over time, a permanent life policy may be your best option. Getting approved again down the road may be more difficult once their condition has worsened.

​A Guaranteed Universal Life insurance policy (GUL) is cheaper than other permanent policies. ​A guaranteed universal life policy costs about the same as a term life insurance policy because it does not have the cash value accumulation. Policy holders just lock in the rates at their current age. Costs can be reduced even more if you select a specific age to end coverage.  This might be 80, 90 or 100 years old, or any age you desire.

How Much Life Insurance Will Be Required for a Special Needs Child?

The short answer is that it depends on the purpose of the policy.  If you’re only buying a policy to cover funeral and final expenses, then it will be a relatively small amount, perhaps $25,000.

If you are buying coverage to recover lost income or provide money for retirement because you were a caregiver with an income stream that was diminished over time, you will need to buy a much larger policy amount, maybe $100,000, $250,000 or more.

You should consult with an agent or your personal financial advisor before making this decision.

The Consequences of Naming a Special Needs Child as Your Beneficiary

Naming your child as a beneficiary could have several consequences.

Insurance companies can’t pay out benefits to people under the age of majority (18 in every state except Alabama and Nebraska, where it is 19).  If a special needs child is still a minor, you’ll need to name a custodian of the funds.  If you don’t do this, the court will appoint one.  It may not be somebody you want, and it may tie up the funds for some time.

Naming your child as a beneficiary could also put them in jeopardy of losing any government benefits they may be receiving such as Medicaid.  There are extremely low thresholds of how many assets a recipient can have and coming into a large amount of money through a payout could actually cause more problems than benefits.

When it comes to life insurance, you might choose to solve this problem by naming your living trust or a child’s special needs trust as the beneficiary. You could also name your “estate” as the beneficiary, particularly if you have a number of children or other beneficiaries. The proceeds can then be divided easily in as many portions as the document specifies, with the special needs child’s share passing out to his or her special needs trust.

For any special needs children who may be unable to care for themselves as adults, you’ll want to make special arrangements to ensure they have the care and oversight they need indefinitely.  Life insurance does provide for this, but you may also need to consider appointing someone who would have full legal guardianship who will protect the individual’s autonomy and best interests.

In some cases, you could be legally prohibited from naming your special needs child as a life insurance beneficiary, such as in “community property” states that require you to name your spouse. If there’s no law in your state against it, there’s nothing holding you back from making your child as your beneficiary.

What Type of Life Insurance Is Best?

It depends on your situation.

​Term life insurance pays death benefits only. You buy the policy in periods of time such as 10, 20, or 30 years. Because it just covers a specified period of time only, it’s the cheapest form of life insurance.

​The tradeoff is that it will not cover you for your entire lifespan. Many companies have the option to renew a term policy, but it can be an enormous price jump from what you were previously paying because of the number of years that have passed. For a special needs child, or if you have experienced health problems since you last went through underwriting, you could encounter a rating or decline.

Most term policies have a conversion feature that allows you to change your policy from a term to permanent policy at specific points throughout the term.

Check to see whether a company will convert a term policy to a Whole Life or a Universal Life policy. ​

​Permanent life insurance policies are more comprehensive than term ones. They have extra features on top of covering a special needs child for life.

As long premiums are paid on time, you never have to worry about the policy terminating. You will never need to worry that your child will be unprotected.

​But a permanent policy is more expensive. This is offset by the fact that permanent policies have a cash value accumulation feature in addition to the death benefits. The cash value accumulation allows you to borrow against your life insurance policy. Death benefits are held as collateral in case you don’t pay back the loan and accumulated interest.

​Permanent life insurance comes in many forms, including Whole Life, Universal Life and Guaranteed Universal Life.

Whole life policies have fixed regular premiums.  Universal life policies are more flexible, depending on the individual policy terms. With some universal life policies, it may be possible to change or skip regular premiums, or to increase the face value of the policy over time.

Special Needs Trusts and Life Insurance

A Special Needs Trust is a way of protecting your child financially while not putting their government benefits in jeopardy.  Money in a trust is used to supplement benefits and protect the beneficiary from creditors and predators who may try to take advantage of a special needs person.

Assets from a Special Needs Trust can be used to pay for amenities such as:

• Housing
• Supplemental medical care
• Transportation
• Rehabilitation
• Education
• Entertainment
  Home health aids
• Trips and vacations
• Computers and other assisted communications and adaptive equipment

There are three main types of Special Needs Trusts: Pooled Trusts, Self-Settled Special Needs Trusts and Third-Party Supplemental Needs Trusts.

Third Party Trusts are recommended because they can provide additional resources as needed without limiting a child’s ability to receive other needs-based assistance/programs, do not require any Medicaid payback provisions, and allow remaining funds in the trust to pass to other beneficiaries.

If you are considering setting up a Special Needs Trust, here are a few things to guide you:

• Special Needs Trusts are not subject to probate in most places. A trust lawyer can tell you if you live in an area where they do. This provides a massive benefit to your child because probate can last for years.
• Name someone other than the special needs child as the beneficiary. This is primarily because they may not be able to manage the money on their own and they may lose out on state and federal assistance. ​​Name a responsible person as the beneficiary. This person will also act as the trustee of the special needs trust. Consider naming a secondary beneficiary who can provide an additional layer of support in case something happens to the first beneficiary.
• Make sure all family members understand how the proceeds will be distributed. It’s also a good idea that everyone in your family should know what is going on so that everyone can ensure the child has protection throughout their adult life. Beneficiaries can include friends, family, other children, your lawyer, or financial advisor.
• ​To limit tax issues and avoid probate problems, prepare a last will and testament. Again, the special needs child should not be named in the will since this could deny them federal and state benefits.
• ​Caregivers are generally required to apply for guardianship or conservatorship when the special needs child reaches age 18. This allows them to maintain control over the finances and healthcare decisions relevant to the child’s care. Different levels of control are available depending on the ability of the special needs child to function. This process takes about a year so it should start a year before the child reaches age 18.

Listing a Special Needs Trust as Your Life Insurance Policy Beneficiary

There are several benefits you may realize when you list a special needs trust as your life insurance beneficiary.

Also known as a supplemental needs trust, this type of arrangement is specifically for life insurance and estate/inheritance beneficiaries who are not able to manage their own finances and care.

With a special needs trust, you can designate exactly how the funds should be used.  A trustee will manage the funds exactly how you want them to be used.  A co-trustee can also be put in place to ensure the funds are being used as they were designated.  Often times, a co-trustee will be an attorney or a law firm.

Creating a special needs trust also ensures that a special needs child can still qualify for government assistance such as Supplemental Security Income (SSI) or Medicaid.  These payments might otherwise be in jeopardy if a payout is made directly to a special needs person.

What Happens When My Special Needs Child Gets Life Insurance Payout?

Before you get to the point where your special needs child gets a life insurance payout, you need to take a step back and consider the implications before putting them in that position.

While it’s true that you are providing for their financial future safety, there are some impacts that could also have a negative effect on them as well.

For example, many special needs children and adults rely on some form of government disability payments or assistance to help them cover basic living needs.  This is especially true if they are living independently and no family members are supporting them.

If you name your child as a beneficiary on your life insurance policy, it could impact their eligibility to receive public disability assistance.  Even a small payout could make them ineligible for financial aid.  Complicating matters even more, Medicaid has a payback provision that might require your child to repay the government after they receive a lump sum benefit.

If you still want to provide for your special needs child, but without the possible onus of the above implications, you may be able to set up a special needs trust to benefit your child.  It’s possible to create a trust where life insurance needs are not counted as an asset.

This can also extend to other types of gifts and contributions as well, including inheritances that can be left to the trust instead of directly to the child.

Another Alternative: Setting up an ABLE Account for a Special Needs Child

​Another way to protect the finances of your special needs child is to set up an ABLE account.  ABLE is short for Achieving a Better Life Experience and is a tax advantaged savings account for children who developed a disability before the age of 26. If you meet this age criteria and are also receiving benefits already under SSI and/or SSDI, you are automatically eligible to establish an ABLE account.

The beneficiary of the account is the account owner, and income earned by the accounts will not be taxed.

ABLE accounts allow a child to set aside over $2,000 each month so they can continue to receive Social Security and any state benefits. ​ The total annual contributions by all participating individuals, including family and friends, for a single tax year is $15,000. The amount may be adjusted periodically to account for inflation.

Contributions must be made using post-tax dollars and will not be tax deductible for purposes of federal taxes.  Some states may allow a deduction for contributions made to an ABLE account.  It’s important to know that for ABLE accounts each state has its own requirements that must be met in order to set up this type of account.

The original law passed in 2014 stipulated that an individual had to open an account in their state of residency, but this was eliminated by Congress in 2015.  This means that regardless of where you live and whether or not your state has decided to establish an ABLE program, you are free to enroll in any state’s program as long as that the program is accepting out of state residents.