Life insurance for special needs children

How parents can use life insurance to protect their kids with special needs.

If you are the parent of a child with special needs, there are two types of life insurance 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.

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Life insurance for parents, to protect your special needs child

If you have a child, a life insurance policy is one way to ensure 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 is “pure” insurance, and whole life insurance, which is a permanent policy that lasts as long as you keep paying premiums and incorporates a cash value.

Term life is the right product for most people, and not only because it can cost six to 10 times less than whole life. 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 special needs 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.

Naming your child as your life insurance beneficiary

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 to name your child 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.

The other option is set up a special needs trust for your child and make the trust the beneficiary of your death benefit.

Special needs trusts and life insurance

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 ensure the funds are being used correctly.

Another benefit is that the trust ensures that your child can still qualify for public, needs-based benefit programs like Medicaid and Supplemental Security Income.

Your 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.

Survivorship life insurance for parents of special needs children

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 once both policyholders have died. This kind of policy may be cheaper than individual policies or may be a way to provide coverage to a parent who can’t qualify for his or her own individual 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.

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Life insurance for your special needs child

Life insurance is meant to act as income replacement, and children don’t earn income, so it almost never 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:

1. Life insurance provides money for funeral expenses and time to grieve

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 work could provide a death benefit if your child dies.

2. Life insurance protects your child’s insurability

Some medical conditions could mean that it could be expensive or even impossible for your child to purchase life insurance as an adult. Insuring him as a child is one way to ensure he’ll always be able to have a small amount of life insurance.

How to buy life insurance for your special needs child

There are two ways to purchase life insurance for a child:

  1. You can purchase a children’s whole life policy. This is a type of permanent life insurance made specifically for children. Benefit amounts are generally $50,000 or less, and as long as you (or your child) pay the premiums, the policy doesn’t expire.

  2. 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 carrier and benefit amount. Some carriers allow you to convert the rider to a whole life policy when the rider expiries usually when your child turns 25 (or you turn 65).

Read more about how child riders work and how they vary in cost and coverage by carrier.

A Policygenius agent can help you decide what kind coverage is right for your family and your child.

Further reading

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Military personnel have a few extra considerations to make, but buying life insurance doesn't have to be difficult.

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The best life insurance companies for baby boomers

Most baby boomers might not think they need life insurance, but there are many reasons they still might.

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The biggest life insurance companies

Are the biggest life insurance companies the best ones for you? Here's when it does and doesn't matter.

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Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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