Setting Up a Special Needs Trust with Life Assurance

Parents of special needs children will have special needs for insurance. Their financial planning will be quite different due to the fact that they will need to continue to provide for the special child even well into adulthood and even after the parents are gone. This will have to take into consideration their continuous care and upkeep, as well as medications, therapy and other expenses related to managing their disability.

With diligent financial planning, you as a parent can be confident that your child’s lifetime needs are covered, even long after you are gone. One important component of the financial planning process will be to determine how much life assurance is needed.

Some Mistakes

When providing for special needs children through life assurance and the remaining estate, here are two mistakes you need to avoid:

  • Naming the child as the direct beneficiary.
  • Leaving the money to the special needs child directly.
  • Leaving the child’s inheritance to another member of the family.

If the child is a beneficiary to a sizable estate, these may disqualify the child from government benefits that he may have been receiving. Also, leaving the money directly to a child who may be mentally impaired will lead to problems as he is not equipped to make sound financial decisions. In addition, if the money is left with another individual, it may be counted as that person’s assets and may be subject to creditors, seizure, divorce, bankruptcy and litigation.

A Special Needs Trust

This may be the solution for this situation. Creating a special needs trust will help ensure that there is enough money for the child to spend on living expenses. A special needs trust is a set-up where it is managed by a trustee (who is prohibited from benefiting from the proceeds of the trust personally). The trustee is responsible for dispersing the funds. The contents of a trust may comprise the proceeds of a life insurance policy, as well as property, stocks and savings.

Here are three kinds of special needs trusts to consider, based on the specific situation of the child:

  • General support trust.

    This pays for almost all the needs of the child (food and shelter, clothing, home insurance, property taxes and utilities). It can also provide cash for the child. However, this will disqualify him for any government assistance.

  • Self-settled trust.

    If the child is disabled but can make sound decisions, this trust can be created using the child’s own funds that they can then decide how to spend. However, if the child is also receiving government assistance, these will revert back to the government once the child dies and will be taken from the assets in the trust.

  • Third-party settled trust.

    This is what is usually used and will only provide for specific expenses such as hospital and dental bills, computer equipment, health aides and equipment for the home and rehabilitation expenses.

Funding the Trust with Life Assurance or Life Insurance

When funding a special needs trust, you should choose the right life assurance product to fit your specific situation.

Whole life assurance is ideal since the death benefit will be paid out at any time a covered parent dies, since the coverage is up to the lifetime of the parent. However, it should be not that the cash value (and subsequently, the required premium payments) may be affected by the current economic conditions.

Term life assurance will be the most affordable, however, this is usually only for the short term. In the event that the parents outlive the policy coverage period, this means that the trust will not be funded when the parents die after the policy has expired.

Second to die life assurance is more affordable than two policies and will pay out when the surviving spouse dies. But both parents must determine whether the surviving spouse can survive with his or her income after the death of the first spouse.

To protect your loved ones for less, fill the form on the right to get your life insurance quote.