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How parents and caretakers can use life insurance to protect their kids with special needs.
If you are the parent or guardian of a child with special needs, there are two types of life insurance policies to consider: a policy that insures you, the parent, and makes your child the beneficiary; and a policy that insures your child and makes you the beneficiary. The first type of policy is more common, but there are circumstances where the second type of policy could make sense, too, to ensure that your child is taken care of financially no matter what.
Children with disabilities don't typically need their own life insurance policies if they do not provide income
For parents and caretakers of children with disabilities, naming an adult child (over the age of 21) as the beneficiary of your term life insurance policy is a great option
If you are a parent, adding a child rider to your existing life insurance policy will help cover funeral expenses if the unimaginable happens
If you have a child, a life insurance policy is one way to make sure that their needs can still be met when you die, and if you have a child with special needs, that kind of protection can be important once your child is an adult, as well.
There are two types of life insurance: term life insurance, which lasts for a set period, and whole life insurance, which is a permanent policy that lasts as long as you keep paying premiums and has a cash value.
Term life insurance is the right product for most people, primarily because it can cost five to 15 times less than whole life insurance. It also makes sense because many people only need to provide for their children up to a certain point; after that, the children will be adults, working and paying their own expenses.
But if you have a child with disabilities who is likely to need care into adulthood, a whole life policy may be right for you. Many people with special needs children choose whole life because the policy doesn’t expire; as long as you pay the premiums, your child will be able to receive a benefit no matter when you die.
Insurance companies can’t pay out benefits to people under the age of majority (18 to 21, depending on your state), so if your child is still a minor, you’ll need to name a custodian of the funds if you want your child to be the beneficiary of your life insurance policy. If you don’t name a custodian in the policy, the court will appoint one, which could result in the funds being tied up.
A special needs trust, also called a supplemental needs trust, is a type of trust specifically designed for life insurance and estate beneficiaries who are unable to handle their own finances and care.
Special needs trusts allow you to leave specific instructions for how the funds should be used. A named trustee manages the funds within your specifications; a co-trustee, such as a lawyer or firm, will guarantee the funds are being used correctly.
A lawyer can help you create and customize your trust for your specific situation, including deciding how you want the funds to be used and the names of the trustees and co-trustees to administer the funds.
You can change the beneficiary on your life insurance policy at any time, so you do not need a trust set up before you apply for life insurance.
The best life insurance options for parents are usually individual term policies or individual whole life policies for each parent, but there is another option: a joint whole life insurance policy that covers both parents.
Joint life insurance policies are whole life insurance policies that name two people as the insured. There are two types:
Survivorship life insurance, also called second-to-die joint life insurance, is a type of joint life insurance policy that pays out only when both policyholders have died. This kind of policy may be cheaper than individual policies and/or may provide coverage to a parent who can’t qualify for their own policy.
First-to-die joint life insurance pays out when the first of two policyholders dies and doesn’t pay out when the second dies. This type of joint policy could leave your child without resources when the second parent dies, and likely isn’t a good option for parents of special needs children.
Life insurance is meant to act as income replacement, and children don’t typically earn income, so it rarely makes sense to purchase life insurance for a child.
But if you have a child with a complicated medical background or other special needs, it may make sense to have some life insurance coverage for your child:
The average funeral costs about $10,000. If you couldn’t afford to pay for a child’s funeral or keep up with bills while you grieve, a life insurance death benefit could make a huge difference. Either a child rider or a whole life policy could provide a death benefit if your child dies.
Some medical conditions could make it too expensive or even impossible for your child to purchase life insurance as an adult. Insuring them when they are children guarantees they’ll always be able to have a small amount of life insurance.
There are two ways to purchase life insurance for a child:
You can purchase a children’s whole life policy. This is a type of permanent life insurance made specifically for children. Benefit amounts are small, generally between $25,000 to $150,000, according to Policygenius data. As long as you (or your child) pay the premiums, the policy doesn’t expire.
You can add a child rider to your own policy. This is the best option for most people. These riders provide $5,000 to $25,000 of coverage per child for about $20 to $200 per year, depending on your insurance company and benefit amount. Some insurers allow you to convert the rider to a whole life policy when the rider expires, usually when your child turns 25 or you turn 65, whichever comes first.
A Policygenius agent can help you decide on the right coverage for your family so you can ensure they are financially protected even after you’re gone.
It depends. For most parents, a term life insurance policy is the best option because it’s more affordable and offers coverage while their children depend on their income most. But for parents of children with disabilities who will need care and financial support into adulthood, a whole life insurance policy might make the most sense (if you can afford the premiums).
In most cases, no. While it’s perfectly legal in most states to name a child as a policy beneficiary, age of majority laws prevent life insurance companies from paying the death benefit directly to minors. Instead, designate an adult you trust as your beneficiary and make sure you create a will so your child is protected financially.
Child riders are low-cost additions to existing life insurance policies. A single child rider will usually cover all current and future children in your household for a small premium. If you’re looking for financial protection for your child, riders are usually a more sensible option than purchasing child life insurance.
Rebecca Shoenthal is an insurance editor at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.
Logan Sachon is the co-founder of The Billfold, a groundbreaking personal finance site for millennials that was named one of Time's 25 Best Blogs of 2012. Her work has been published in New York Magazine, Glamour, The Guardian, BuzzFeed and more.
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