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Life Insurance in Special Needs Planning

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Families with special needs are just like every other family – except where they are not… Here are some extra considerations when working with families who have children with special needs, courtesy of a top producer with experience in the field.

Brad Elman
Brad Elman

Families that have a child with special needs should initially approach their life insurance program like any other family.

The fundamental question to ask is, “What is the economic impact to the family if Mom and/or Dad were to die?” For most families, the loss of one or both parents is emotionally and financially devastating. As complex as this scenario is for typical families, families with special needs are especially vulnerable if one or both parents die.

The biggest mistake I see among clients who have met with an advisor who claims to have experience working with families with special needs is when the insurance advisor focuses too narrowly and only plans for the “future care” of the child with special needs. This planning mistakenly focuses on selling a permanent policy to fund a special needs trust instead of addressing both the immediate and long-term planning. Permanent insurance is an important part of planning for special needs, but it is imperative to address the immediate risks in addition to the long-term risks. Term life insurance is critically important to most families with special needs and it is affordable. Most families we work with are single-income families because one parent is typically a full-time caregiver. Bottom line: don’t forget a high quality, convertible term policy.


How much life insurance is enough?
Planning for a family with a child with special needs is like planning for a typical family. No matter the tool used – financial planning software, a spreadsheet or a yellow pad – the process involves funding “one-time needs” like paying off a mortgage and “ongoing needs” like income replacement. Whatever your process, start the same way for all families and then add a few extra considerations for families with special needs.


Ongoing income duration
In typical situations, many people want to replace the lost income until the children are “grown up.” Others may wish to replace the lost income for as long as the surviving spouse is alive. For families with a child with special needs, this issue is especially important because the child may never “grow up” and at the same time could have a typical life expectancy that may extend 30 years or more after the death of the parents.


Ongoing income special considerations
Typical planning for wage earners involves replacing their income, but in a special needs situation we must also calculate the cost to replace their non-earning duties that contribute to the success of the family. Additionally, we need to consider the financial impact of the caregiver’s death on the wage earner’s ability to earn. This is especially important if there is a prolonged illness leading to the death of the caregiver.

Determine primary wage earner’s economic value
Determine the economic value of the wage earner(s) as a first step. Start with the wage earner’s salary as the basis of the family’s ongoing needs. Next, calculate the value of the help he or she provides that would be lost at death. Here are a few questions to help determine how much non-monetary support the primary wage earner provides:

  • Does he/she help the child with special needs get ready in the morning?
  • Does he/she assist the child with special needs at night or on the weekends?
  • What jobs would need to be replaced if one of the parents were to die?
  • What would it cost to hire someone to do those special jobs?

Remember, even in a single-income family, the wage earner may still be assisting the primary caregiver. The cost to replace that care adds up.


Determine primary caregiver’s economic value
Full-time parents of children with special needs do more jobs than a single employee would be able or willing to do. As a result, this calculation is similar to calculating the cost of replacing the support activities in a typical family, but it will differ in the amount and type of work that would need to be replaced.
The caregiver writes the Individualized Education Plan (IEP), drives to a dozen therapy and doctors’ appointments per week, walks the dog, washes the clothes, makes dinner, cleans the bathrooms, puts away the Legos and helps with the homework all with grace, dignity and kindness. Those job skills aren’t easy to find in a single employee or even a new spouse. Appropriate planning is especially critical for full-time caregivers.
Caregivers of children with special needs often provide more than $100,000 per year in value to the family. This number is much higher in some cases or parts of the country. These contributions need to be translated into the dollar amount of replacement cost and insured! Fortunately, with low-cost term life insurance this risk can be insured for a relatively low premium.


An additional consideration for determining the impact of the death or illness of the caregiver
If a caregiver gets sick, it can physically and mentally affect the wage earner’s ability to earn a living. The primary earner may have less time to devote to work as he or she helps the family more frequently. The emotional stress of the spouse’s illness will have an impact on the wage earner’s ability to be effective at his or her job.
If the caregiver dies, especially after a prolonged illness, the wage earner may not be able to go back to the routine of fulltime work right away. He or she may want or need to spend time with the children and take time to heal personally and help the family learn to cope and adapt.
We recommend that advisors add additional insurance equal to one year of wages for the primary wage earner in addition to the one-time needs and ongoing needs for the primary caregiver. This way, if the primary caregiver dies, the wage earner can use the additional income to readjust or replenish savings to make up for time previously taken off.

Getting the “amount” of insurance right is the most important part of a plan, but getting “duration” right is a close second!
Decide how long the family will need coverage under the consideration that a child with special needs may not become independent. As a result, the duration of the insurance may need to be longer than typical. A common 20-year term policy may not adequately cover the risk a family faces. It’s important to have the insurance last as long as it needs to. We use two strategies to help accomplish this:

  • Laddering different policies for different durations
  • Purchasing a longer-duration policy


Laddering policies
Laddering insurance is a technique in which we try to match the duration of the coverage with the duration of the need. Usually there are typical kids and typical planning needs co-existing with special needs. We can use short-term insurance (20-30 years) to mitigate the shorter-term risks, and long-term insurance to specifically address the longer-term risks like providing income to care for a child with special needs after their parents die.
Parents basically have three options for funding the inevitable expense of caring for a child with special needs after the second parent dies:
• Save money for the child’s future in a Special Needs Trust
• Leave an inheritance (a remainder estate created by not enjoying/consuming all the parent’s retirement assets)
• Fund the child’s future care with permanent life insurance paid into a Special Needs Trust

Why life insurance?
If it is inevitable that a child with special needs will require funding for future care, life insurance is particularly effective because it:

  • Is simple
  • Is predictable
  • Funds at the time the money is needed most (parent’s death)
  • Has tax benefits when properly structured
  • And, in most cases, is cheaper than any other funding option Life insurance is critical for families with a loved one with special needs, but the best planners treat their special clients like every other client… Except where they do not.

Brad Elman’s life insurance practice focuses on business and estate planning. Elman, CLU, CLTC, is a founding member of the Northwestern Mutual Special Steps program dedicated to helping families of children with developmental disabilities plan for their financial security. Brad is a 26-year MDRT member with 16 Court and one Top of the Table Qualifications. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries. Bradford L Elman is an Insurance Agent of Northwestern Mutual.

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