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Caleb Harty
BY Caleb Harty

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

Life insurance is one of those topics that seems like it should be simple and straightforward, but so often people seem to get confused by it. Worse yet, they overlook it as a critical piece of their special needs planning. Especially for families who have a child with special needs, I would argue it is the foundation of any well-laid plan.

Term Life Insurance

There are two general categories of life insurance: term and permanent. Term can either be individually owned (where someone buys a 10- or 20-year term policy for example, through a life insurance agent) or group coverage. Many employers provide group coverage inexpensively, but it is often limited in how much coverage can be obtained. It also usually goes away when the job does, creating gaps in protection.

How long does it last?

Term life insurance lasts however long the “term” is (20 years being a common length) before expiring. For example, consider a wife and husband who both work and earn $100,000 each, have a mortgage of $500,000, and have two young children. They may get a $1,500,000 20-year-term life insurance policy each. This would replace their lost income and help pay off the mortgage if either were to pass away during that 20-year period. If they’re healthy, this coverage will be relatively inexpensive, because the likelihood of passing away between the ages of, say, 35 to 55 is very small—but the financial consequences are very great if it does happen.

Is it enough?

For many families, this is where the conversation ends: getting coverage when the kids are little and there is a mortgage, “just in case.” For families who have a child with special needs, however, the need for life insurance protection never fully goes away. The child will likely always in some way be financially dependent on the parents. This is where permanent life insurance comes into play, such as “whole life” or “universal life.”

Permanent Life Insurance

Permanent life insurance is just that: designed to be permanent and last forever. Whether someone passes away at 55 or 100, the death benefit proceeds will pay out. An important note is that the beneficiary of the policy will be the child’s special needs trust so that public benefits are not jeopardized. The owner of the policy can either be the parents or a trust (the latter if estate taxes are a concern).

When does it pay?

Typically in the context of special needs planning/estate planning, the type of permanent policy utilized is a “second-to-die” or “survivorship” policy. The death benefit proceeds do not pay out until both parents have passed away. Ultimately, this is when the need arises—when both parents are gone, and someone else needs to be hired by the trust to attempt to do the things the parents have done, such as advocacy and care coordination. Life insurance may not be the only asset left to the special needs trust for benefit of the child with special needs. However, it is often one of the most effective. It is tax-free and not correlated to the stock or real estate market.

Term plus permanent

For families with a child with special needs, a combination of term and permanent may be advisable. Consider how much term life insurance you should have if you pass away prematurely, as any family should. But also, as part of a well-thought-out special needs plan, calculate how much permanent life insurance you should have for when you pass away someday. In doing so, you can have peace of mind that your child will have sufficient funds available while not being overly reliant on government benefits in all of the uncertainty that surrounds them.


Note: This article is for informational purposes only. Neither Caleb Harty nor Harty Financial provide tax or legal advice. Please contact your attorney or accountant and rely on their independent research and advice for these matters.

Caleb Harty

Written on June 29, 2017 by:

Caleb Harty is the Principal of Harty Financial. He specializes in helping parents plan financially for their children with special needs as well as retirement planning. He lives in North Reading, MA along with his wife Amanda and can be reached at (978) 972-5961 or [email protected]