Pros and Cons of Using Life Insurance for a Special Needs Trust
Some frameworks to help you decide if it's right for you
When your child is significantly impacted by their disabilities and/or they have complex health needs you often need to plan for two generations, yours and theirs. In the United States, you are limited to how much money you can earn and have in your name if you want to get any support from the Federal government or your State. There’s a lot of content out there explaining these limits, so I won’t go into it here.
If your situation is anything like mine, then the odds of your child finding work and earning enough to live on are slim to none, and Slim just walked out the door. So you’re going to have to help them out. Last week I covered how to figure out how much money you need. This week I’m going to share why I think life insurance is the best way to fund your Trust. I’m going to do my best to share the pros and cons, but I want to acknowledge I may leave something out that you have personal experience with. Please share your experience(s) in the comments and help the community.
At a very high level, insurance is a way to cover a future big expense by paying much smaller amounts over time. Life insurance death benefits will often be 100x - 1,000x or more than what you are paying in premium. What you pay will be based primarily on your health and age. And an insurance company won’t let you get too much, they don’t want to pay your family more than you’re worth. I know I sound callous, but it’s important to understand it’s very unlikely an insurance company will “overinsure” you. Most of us, on our own, do a poor job estimating how much money our family will need when we’re gone.
In my experience, the primary competitor to life insurance is investments. Specifically, parents would leave what’s left in their retirement accounts to their children. I have a big problem with this. According to USA Facts, almost half of American households have not saved anything for retirement! At best, Social Security is only going to cover ~ 1/3 of what you need. So it looks like many Americans will not have enough for themselves, much less their children.
Before I dive in, let’s discuss the basic types of life insurance that are available - term and permanent. Again, keeping this very basic. Term insurance is insurance that has a fixed coverage period. For example, it could be 10 years, 30 years, until age 80, until you leave your job, etc. It’s usually fairly inexpensive because most of the policies don’t pay out. Permanent insurance will last until you die.
Now let’s use an example of what using insurance could look like. From there I will dive into the pros and cons.
Keep reading with a 7-day free trial
Subscribe to Waypoints to keep reading this post and get 7 days of free access to the full post archives.