Why your life insurance is key to financial planning for your special-needs child

Financial planning for any family is complicated, but the challenges rise to a new level when a child has special needs.

“Parents are not only planning for their family’s needs and retirement, but for well beyond their lifetimes,” says Linda Hunter Suzman, a Special Care Planner with MassMutual Financial Group in Seattle.

The process, including buying life insurance policies, is fraught with legal considerations. Well-meaning parents who name children as beneficiaries on their policies put them at risk for losing eligibility for government assistance. Under federal law, anyone who receives a gift or inheritance of more than $2,000 is disqualified for benefits, such as Supplemental Security Income and Medicaid.

That’s why assembling a team of trusted financial advisers is critical, including an accountant, attorney and life insurance agent who specialize in helping families like yours.

Life insurance as financial safety net: set up a trust

An attorney can help you set up a special-needs trust — an important tool if you think your child will require government help. A special needs trust holds assets for your child, and can be named as a beneficiary for life insurance. A trustee, usually a family member, distributes money to take care of your child. When set up properly, a special -needs trust provides money to maintain your child’s quality of life and preserves eligibility for government benefits.

The trust shouldn’t be generic or inflexible, but designed specifically for your child, says Diedre Wachbrit Braverman, a special-needs estate attorney in Boulder, Colo.

Braverman, whose brother has severe autism, speaks from experience; she helped her parents set up a trust. She recommends working with a special-needs attorney — not just an estate attorney. The Academy of Special Needs Planners provides a search tool to find attorneys. She also recommends finding a knowledgeable life insurance agent.

Life insurance plays an important role because most families cannot save enough money for their children’s lifetime needs, and the coverage provides security in case a parent dies prematurely.

A growing number of life insurance companies have established units for special-needs planning. MassMutual started its SpecialCare program in 2004. The company worked with The American College in Bryn Mawr, Pa., to develop coursework and the Chartered Special Needs Consultant designation for agents who complete the schooling.

The training is open only to MassMutual agents, but will become available industry-wide in 2014, says Allen McLellan, associate dean and assistant professor of insurance at The American College.

“I predict there will be great demand for it,” he says. “Working with families in this situation takes deep and really broad knowledge. Most of the advisers who do well are driven, and the work is a calling.”

MetLife started its Center for Special Needs Planning 12 years ago upon the urging of an employee, a parent of special-needs children. The program provides training for agents and resources for families. More than 80 percent of the people who work in it have a family member with special needs, says Kelly Piacenti, director, and also a mother of four, including an 11-year-old boy with cerebral palsy.

Piacenti is not surprised at results from a recent MetLife survey that showed less than half, 49 percent, of caregivers have identified a guardian for their dependent should they no longer care for them. More than half, 56 percent, are unfamiliar with how to identify a trustee to watch over their dependent’s financial holdings, and another 55 percent aren’t sure how to set up a plan for lifetime financial assistance for their dependent.

Parents of special-needs children are so consumed with the day-to-day they have little time or energy to plan, she says. And questions about the future are scary.

“Who’s going to do this? Who’s going to take care of him when we’re not here?” says Piacenti, whose son requires intense medical attention. “This is what keeps us up at night.”

Tips for using life insurance to plan for the future of your special-needs child

Suzman understands the stress on families because she’s been there, too. Her son, now in college, was diagnosed on the autism spectrum. She recommends the following insurance tips:

Make sure you have enough individual disability insurance and long-term care insurance for yourself, so the family isn’t strained if you become disabled or need long-term care.
Invest in a whole life insurance policy to help finance your child’s lifetime needs. Permanent life insurance also provides cash value, which you can borrow against in emergencies.
Consider important riders, such as waiver of premium, which pays the premium if you become disabled; and a guaranteed insurability rider, which lets you purchase more life insurance later without undergoing a medical exam.
Finally, don’t procrastinate. Help is at hand, and financial planning doesn’t have to be expensive, Suzman says.

“But not planning, writing no wills and leaving guardianship up to the courts — that’s a parent’s worst nightmare.”

Term life insurance vs. permanent life insurance: Is cash value the best value?

If you’re looking for life insurance, aside from considering how much you need, you’ll find the need to understand and possibly choose between the two basic types: term life insurance and cash value life insurance.

The main difference between the two is that term life insurance covers you relatively inexpensively for a set period, whereas cash value life insurance covers you at a much higher cost for the remainder of your life. Cash value life insurance costs considerably more than term life insurance, depending on age and health, but adds a cash value component of debatable merit.

How do term and cash value life insurance work?

Term life insurance generally offers the most amount of coverage for the least amount of money, and is the appropriate choice for most people. The most common reason to buy life insurance is to replace a person’s income in case of early death, and term life insurance is the cheapest and best way to do that. Term life insurance is also an especially good choice for people and families who are just starting out, because it’s relatively cheap and provides a lot of protection when replacing income is most important.

Cash value life insurance, also called permanent or whole life insurance, offers protection for your entire life (as long as you pay your premiums) and more flexibility than term life insurance. However, it usually comes at a much higher price. For example, the premium for a cash value policy can easily be 10 or more times higher than a term policy with the same level of coverage. The feature that makes permanent life insurance different is its ability to gain cash value. A portion of the money you pay into your premium goes into a cash value portion that grows over time, and becomes available for your use after a certain period.

How does cash value work?

The portion of your payment that goes toward the policy’s cash value is very large in the beginning, but decreases slowly as time goes on. That’s because permanent life insurance payments are made up of two parts: the regular insurance premium, which is comparable to the premium amount for the same coverage in a term life policy, and the cash value, or “overpayment” amount. The overpayment money is invested by the insurance company and later used to pay for the higher costs of insurance as you get older. In this way, the company is able to keep your premiums the same instead of increasing them over time. At a certain time, this cash value amount becomes available for your use.

The cash value component of a policy can work differently and be used for different things depending on the type of permanent life insurance you choose. There are four main variations: whole (or ordinary) life, universal (or adjustable) life, variable life, and variable universal life.

Whole life insurance is a predictable policy that provides a guaranteed benefit, a guaranteed earnings rate on your cash value, and a level premium. You may also earn dividends based on how well the company performs. Whole life is the most basic kind of permanent life insurance.
Universal life insurance is a flexible option that lets you vary your premium payments. After the first premium, you can usually make payments at any time. If you have extra money, you can pay more. If you can’t afford to make a payment, you can skip it or pay less. The cash value portion usually operates in a similar manner as with whole life insurance. A problem with universal life is that if you don’t make enough payments, or the company does not perform as expected, your policy could lapse. Newer types of universal life policies include guarantees that this will not happen, so be sure that you explore this option. Universal life can be one of the cheapest forms of permanent life insurance.
Variable life insurance allows you to invest your policy premiums. The problem with this is that if the investments perform poorly, the death benefit and cash value will decrease. On the other hand, if the investments perform well, the death benefit and cash value can greatly exceed those of a normal policy. Variable life is one of the most risky forms of permanent insurance, although its rewards can be great as well.
Variable universal life insurance, as its name implies, is a combination of variable and universal life insurance. It allows you to vary your payments, invest your policy premiums, and vary your coverage amount. Variable universal life insurance is the most flexible type of permanent life insurance, and can be either risky or predictable, depending on how you use it.

Insurance Companies Predicting Your Death


It is not a simple question to ask customers when they think they will die. Life insurance companies must take it upon themselves to determine when a potential customer will perish before they will invest.

Companies compile large amounts of data in order to separate the healthy from the risky. This includes things like driving records, criminal records, drug use, and even hobbies.

Image by John Fischer via flickr.

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