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 is usually free of taxation. 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 benefits. 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. To fund a special needs trust, the best option is some form of permanent life insurance, which will guarantee to pay the death benefit to the trust no matter when you pass away. Term insurance, which only lasts for a specified period of time, may be less expensive but is not an appropriate way to fund a special needs trust. You run the risk of outliving the policy, with the result that the trust will no longer be funded by the death benefit once you’re gone. Couples will often purchase what’s known as a second-to-die or survivorship life insurance policy, which covers the lives of both parents. The policy will pay the death benefit to the special needs trust once the surviving parent passes away. A survivorship policy will cost less than two separate policies for each parent.
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. At Canonico Wealth Management, we can help you decide whether funding a trust with life insurance is a good investment for your family, and if so, how much. We also provide trust services to families. We are designed to support your families' unique needs.
Check our website for more information on Special Needs Planning: Canonico Wealth Management
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
LPL Financial does not provide legal advice or services, or tax advice or services.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.