Life insurance and special-needs children

The right plan can offer security far into the future.

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Parents of children with special needs often double as caretakers — financially and physically — so it’s normal to have concerns about what happens after you’re gone. Life insurance is a tool that can help you protect your child’s overall well-being, but it takes careful planning to avoid jeopardizing your government aid in the meantime.

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How life insurance is different when your family includes a child with special needs.

Most people purchase life insurance to help settle debts and take care of loved ones after they die. For parents of children with special needs, that means putting a plan in place to support your child into adulthood and beyond. It’s a balancing act: Your child needs access to the death benefit, but too much at once could disqualify them from receiving essential government support.

Why whole insurance could be right for you.

Whole insurance policies don’t expire. As long as you pay your premiums on time, your child will receive a lump sum payment when you die. Whole policies usually build cash value over time, and monthly payments remain the same. While a term policy can be cheaper than whole initially, after the term expires, so do your benefits.

What is graded life insurance?

Graded life insurance is designed for people who pose a higher risk to insurers. Parents may consider this option a way to insure children with special needs. Applying and approval is often easier than other types of policies, even with a complicated medical history.

These policies offer only a fraction of the death benefit if the policyholder dies within the first two to four years of coverage. For example, 50% of the face amount of the policy is paid after a death in the second year and 75% after a death in the third. Eventually, 100% of the benefit is paid after the policyholder dies.

But keep in mind that premiums tend to be more expensive with graded life insurance.

Compare life insurance companies

Name Product Issue Ages Coverage Range Medical Exam Required State Availability
18 - 85 years old
$10,000 to $10,000,000+
Depends on provider and policy
All 50 states
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20 - 80 years old
$25,000 to $10,000,000
All 50 states
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25 - 60 years old
$100,000 to $5,000,000
Available in all states except for Montana
Offers term life insurance with accelerated underwriting. No-exam coverage up to $1,000,000 for those who qualify.
18 - 80 years old
$50,000 to $25,000,000
Depends on provider and policy
All 50 states and D.C.
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18 - 60 (or 55 for smokers)
$50,000 to $350,000
Lifefy is not available in the following states: Hawaii, Illinois, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, Puerto Rico, Utah, Virginia, Washington
Offers quick, affordable Term and Guaranteed issue life insurance. Coverage up to $350,000. Only available in 38 states.
25 - 83 years old
$25,000 to $1,000,000
Depends on policy
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18 - 75 years old
$100,000 to $5,000,000
Depends on provider and policy
Currently unavailable in New York
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Is making my child the beneficiary of my life insurance policy a good idea?

Listing your special needs child as the beneficiary of your life insurance policy could render them ineligible for government aid. The government limits Supplemental Security Income (SSI) and Medicaid to individuals with a monthly income of $2,000 or less. So if the benefit pays more than that, it could cost your child their disability support.

Instead, consider sending the money straight to a special-needs trust. That way, funds can be withdrawn as needed to take care of your child without disqualifying them from SSI benefits.

Getting a special-needs trust

Also called a supplemental-needs trust, a special-needs trust is designed for people who require assistance handling their finances. You’ll leave specific instructions for how the money should be used and appoint a trustee in charge of managing funds. A co-trustee, such as a lawyer or bank, can help make sure the money is used appropriately. Depending on your situation, a special-needs trust can be the best of both worlds — giving your child access to the death benefit plus government aid.

How to purchase life insurance

Though applying and underwriting timelines vary by provider, here’s what you can expect when buying life insurance:

  1. Pick a policy type. Research your options to decide the type you’re after — term, whole or universal — and the features you’re most interested in.
  2. Compare providers. After you’ve decided on a policy type, narrow down potential providers. Ensure that your chosen provider carries the type of policy you want and can offer competitive premiums.
  3. Visit the provider. Some providers allow you to apply for a life insurance policy online. Others require you to meet with an agent over the phone or in person to start the application process.
  4. Complete your application. Whether online or in person, you’ll supply personal and lifestyle information that includes your full name and address, date of birth, height and weight, employment information, annual income and your habits or hobbies.
  5. Complete a medical exam. Some providers require that you attend an in-person medical examination. Your agent will help schedule it at a time and place that’s convenient for you. During the exam, you’ll likely submit to a urine and blood test and a check of your height, weight, pulse and blood pressure.
  6. Await your results. An underwriter reviews your application and medical exam results before approving or denying your request for coverage. This process can take several days or several weeks, depending on your provider.

How do I exercise my policy’s benefits?

The death benefits of your life insurance policy are paid out after you die. A loved one or legal representative can file a claim to your life insurance provider accompanied by a death certificate.

Most providers release payment within 60 days of a claim filing. The payment is released to the beneficiary of the policy in fixed installments over a predetermined period of time or as a lump sum, depending on what you select when applying for the policy.

Bottom line

A life insurance policy can help provide for your child with special needs after you die. But to protect the government benefits your child might receive, consider appointing a special-needs trust as the beneficiary of your policy. Compare life insurance providers to find the best fit for your needs, and then talk to your agent about your goals and concerns.

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