Guide to life insurance for parents of children with disabilities

Caring for a child with a disability can be a great joy, but it also comes with a unique set of challenges. Caring for your child may mean establishing a plan for lifelong support, rather than just 18 years. For many parents, life insurance may be part of this plan to financially support the needs of their child.

How much life insurance should you have as a parent of a child with disabilities?

Determining how much life insurance you need is a highly personal decision based on your age, lifestyle and financial situation, as well as on the needs of your dependents. For many people, the need for life insurance decreases as their children grow up and head out on their own. However, if you have a child with a disability, it may be a bit more complicated.

Your first step is likely to sit down and make a list of your child’s future expenses as best as you can. It may help at this point to work with professionals who understand the long term needs of children with disabilities. These may include a disability rights lawyer, social worker and healthcare professional.

Estimating future expenses for your child with a disability

Understanding your child’s potential lifelong financial needs, including paying for caretaking services you currently provide, may help you purchase enough life insurance coverage to feel secure in their future. Some of the possible expenses include the following:

• Physical therapy or occupational therapy: As a parent of a child with a disability, you may spend thousands on therapy to support your child’s physical and mental wellness. When calculating expenses, you may want to account for any potential insurance contributions.
• Medical expenses: A child with a disability may need more medical care than their average peer. You may want to consider medical care costs and insurance costs when determining future expenses.
• Transportation: Transportation for children with disabilities may require vehicle modifications or a paid transportation service.
• Education: Many students with disabilities opt to attend private schools that cater to students with special learning considerations. The cost of attending a private school varies, but costs for tuition, books and uniforms can add up.
• Cost of a service animal: Service animals, such as guide dogs and emotional support animals, can be hugely important to persons with disabilities. Families may want to factor in the cost of keeping these animals — including food, pet sitters and veterinarian care.
• Adaptive equipment: Adaptive equipment refers to any device that makes daily tasks easier for persons with disabilities or special needs. These devices may include grab bars in the shower, a wheelchair lift or hearing aids.
• Caregivers or support personnel: Employing a caregiver can be expensive. Depending on the level of support your child will need, this may total thousands of dollars per month.

Best life insurance for parents of a child with a disability

The type of insurance policy for a parent of a child with a disability depends on their unique circumstances, coverage needs and budget. Life insurance policy types are split into two key categories: term and permanent.

Term life insurance policies expire after a predetermined number of years, with no financial benefit to you after the term period ends. A whole life policy, however, will remain active as long as you pay your premiums.

If you anticipate that your child will outgrow the need for extended care in the future, then term insurance might be a good bet. However, if your child’s disabilities will remain with them for life, then a permanent life policy might be a better choice, since it will provide a death benefit no matter when you die, as long as premiums are paid. Although permanent life insurance policies are typically more expensive, many come with added benefits, like a cash value that can be accessed before your death if needed.

One other option is survivorship, or second-to-die life insurance. These joint policies cover both you and your partner or spouse and pays out the death benefit only when both of you have passed away. Life insurance quotes do not vary as much from company to company as other types of insurance, so the best life insurance company for you and your family is likely the one with the coverage options and customer service tools you want, rather than the lowest price tag.

Can my child with a disability be a life insurance beneficiary?

If your child is receiving governmental assistance such as Supplemental Security Income (SSI) or Medicaid, it may be best to avoid naming your child directly as the beneficiary of a life insurance policy. This may disqualify them from receiving assistance, since they must have no more than $2,000 in assets. This is also true if you leave money directly to your child in your will.

A better option could be to create a special needs trust for your child, sometimes called a supplemental needs trust. This type of financial vehicle directs money to your child as needed, and also mitigates the tax concerns that your child might have if they were receiving money directly from a will or other account.

What is a special needs trust?

A special needs trust, also called a supplemental needs trust, allows you to financially support a child with a disability without disqualifying them from SSI or Medicaid. These trusts include three people: the person who funds it, the person who receives the benefits and the manager of the trust, or trustee. This person should be someone who is both good at handling money and someone you trust implicitly, because they will ensure that the financial needs of your child are met after you are gone.

Since the trustee will play a large role in your child’s life, it’s important to choose someone who is responsible and dedicated to your child’s quality of life. If you have no one in your personal world who fits the bill, a professional trustee can be hired. This could be a bank or other individual who will distribute the trust’s assets as needed.

A special needs trust has some key potential benefits. You have full control during your life. You open the account and fund it as you wish. In addition, others, such as relatives and friends, can add money to the trust. And since the money is held in reserve for your child, it does not impact SSI or Medicaid payments. You may even be able to fund a special needs trust with the death benefit from a life insurance policy.

You’ll be given a tax ID number for the trust and the trust must file a tax return each year to report income earned. When income is given to your child, it is taxed at the beneficiary’s presumably lower tax rate.

Creating a special needs trust can be complex, so you may want to work with a lawyer or financial advisor when doing so. Since a special needs trust is created specifically for the needs of a person with physical or mental disabilities, it is generally preferable to a regular trust in that it takes the special circumstances of your child into account.

Frequently asked questions

• • Can life insurance provide enough financial support for my child with a disability?

    Depending on the nature of your child’s disability and the type of life insurance you purchase, life insurance may be able to provide enough financial support for your child after you pass away. Calculating your child’s lifelong expenses and exploring quotes for life insurance policies with enough coverage to pay for these expenses may give you an idea of how fully life insurance will be able to financially support your child. Working with a licensed financial professional or disability advocate may help you ensure that you have a financial plan in place to care for your child for their entire life.

  • How do life insurance needs change with a child with a disability?

    Depending on your child’s needs and your other financial planning tools, you may or may not need to purchase additional life insurance to support your child with a disability. If you have a special needs trust established, that may be sufficient to financially support your child. However, if you’re using life insurance as your primary financial support resource for your child, you will likely need more coverage in place than if you were using life insurance to support a child who will be financially, emotionally and physically independent in adulthood.

  • Can I allocate more of my life insurance payout to my child with a disability?

    Yes, when you purchase a life insurance policy, you will have the option to designate a beneficiary or multiple beneficiaries. You can allocate more or less of the death benefit to each beneficiary by allocating a specific percentage of the benefit to each person. You may also be able to fund a special needs trust with a death benefit from a life insurance policy.