Providing for a Special Needs Child - Part II

Parents of children with autism are often overwhelmed, dealing with issues that fill their time every day of every week of every year. That schedule rarely allows time to think about the future. We owe it to ourselves and our children to be proactive in our thoughts and set aside time to plan on a consistent basis. Our kids have hopes and dreams. Proper preparation and appropriate funds will help make them come true. In a Bankrate survey conducted in 2015, it was found that 32% families with children under 18 who had life insurance carried policies worth less than $100,000. Another 37% in this category had no life insurance at all.

The preceding years of economic downturns and individual procrastination probably rank as the top reasons for these massive oversights. Most families say they haven’t purchased life insurance because they have other financial priorities, yet these same families also say they would have immediate trouble paying expenses if their primary breadwinner died. Why do we insure our cars and homes appropriately but not ourselves?

As the survey illustrates, people (especially young people) tend to opt toward the cheapest plan because their health is not an issue at the time they are purchasing their policy. However, as they age or if they are confronted with an unexpected illness, they cannot afford to make a commitment to coverage. Protect your spouse and your retirement. It’s not an either-or proposition. (For related reading, see: Life Insurance: Putting a Price on Peace of Mind.)

Why You Shouldn't Wait to Buy Life Insurance

In February 2016, Melissa Horton wrote for Investopedia about the benefits of not waiting to purchase life insurance. Her explanation included the ease of qualifying at a younger age, the cost of a life insurance policy at a better health rating, income replacement for spouses and opportunities to convert a term policy some time before the level term period expires. All those reasons factor into a family’s decision, along with the desire to provide for the well-being of a family member with special needs. One question is how do we plan for such a potentially long-time frame? There is no reason most of our children with special needs will not live a full life. Years ago, Dawn and I looked at how much Aaron’s actual expenses were and developed a financial needs analysis to calculate the projected need to cover a minimum of $1,700.00 per month (the actual costs at that time), indexed with inflation. What if it’s 30 years? 40? 50? Yikes! That’s a lot of zeros. Don’t let that stop you—make decisions within your budget and do the best you can. 

Insurance comes into play in long-term planning for the welfare of your child. On numerous occasions I've told clients life insurance is the only alternative that can produce tax-free funding exactly when it’s truly needed. That pricing gets locked in for the duration of the contract. No cash value. No death benefit if you live too long. This approach works very well for families on a budget, disabilities or not. It is the preferred way to have each spouse protect each other when the mortgage is large and the kids are small. 

Funding a Trust

When it comes to funding a trust, the ONLY acceptable result is that the insurance is in force when you die. Effective policy choices for funding special needs trusts are universal life with secondary guarantees/lifetime no-lapse rider and whole life. 

These policy types can be structured to cover an individual or a couple through a survivorship policy. Age, health and hobbies will factor into the insurance company’s policy rates. Your family circumstances will, of course, come into the decision-making process.

The main point to remember here is that the decisions made must be sustainable. Overzealous salespeople and emotional purchases must be avoided. Think about year eight or year 28 of the policy, not the signatures and the first payment. The level of savings to be used and the future budgeting for permanent policies needs to emanate from an unadventurous mindset. Build on the planning, don't over-commit. 

What if the uncertainty over costs and timing is overwhelming? Buy term insurance with convertibility options, as mentioned above. You can lock in your health status and switch to a permanent policy later. 

You may find it useful to visit the video page of LifeHappens.org to see how planning with life insurance helped a number of people in difficult circumstances.

(For more from this author, see: Providing for a Special Needs Child – Part I.)