Parents of children with special needs often have to plan carefully for the future. In addition to looking out for their own welfare, they have to prepare for the ongoing needs of their offspring. That includes the time after the parents have passed on. For many families, life insurance provides essential support. Caring for your child in future decades is no easy task and should be considered with a professional advisor as part of an overall financial plan.
The Role of Life Insurance
The beneficiary to your life insurance policy receives a cash payout when you pass on. While this is important for all families, it can be especially important when the beneficiary requires lifelong assistance. The financial cost of ongoing care and support may be more than what’s in your estate, or what government benefits may provide.
There are two main types of life insurance: permanent and term. Permanent life insurance may have higher initial premiums, but those premiums never increase. As long as you keep up with your payments, the policy will be in place when you pass on. Permanent life insurance often has a minimum cash value, so you’ll have more certainty of what you’ll leave to your loved ones. Permanent life insurance is also sometimes used as an investment vehicle and can have a cash value. This is called universal life insurance.
Term insurance lasts only for a specified number of years, perhaps 15 or 20. Premiums are typically cheaper than permanent insurance but when it comes time to renew the policy at the end of term, you’ll have to pay more for the same benefits since you are now that much older.
Should Your Child With Special Needs Be Your Beneficiary?
Before you name your child as the beneficiary, it is important to think through the potential consequences. A life insurance payout may make your child ineligible for government disability benefits. In other words, without the right legal paperwork in place, your good intentions could have the opposite effect. That’s why it’s a good idea to discuss all your available options with a qualified financial or legal advisor.
One option may be to name a trust as your life insurance beneficiary. Many parents establish a trust for the benefit of their children with special needs. One such specific type of trust is a Henson Trust. The trustee, not the child, decides how these funds are spent. Funds used for the child’s benefit from a trust are not considered the child’s income, and therefore do not interfere with qualification for government payments, like those from the Ontario Disability Support Program.
Obviously, the choice of the trustee is very important, and parents should work closely with professional advisors to make such a decision. That process has additional benefits because you can decide how life insurance and trusts work with your overall estate planning.