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Using Life Insurance For Special Needs Planning

Mar 13, 2018 | Care for a Loved One with Special Needs

Caught up in the daily responsibilities of caring for their loved one, parents and caregivers can tend to neglect their own needs and push preparing for the future to the back burner. It’s important to take time to plan ahead, so that no matter what happens, your loved one has the best chance at a good quality of life and financial independence. Life insurance can be an incredibly versatile way to do this.

Financial Independence for a Lifetime

One of the most common uses of life insurance for children or adults with special needs, and the one that probably first comes to mind when you think about life insurance, is paying for care, housing and other expenses in the event that you predecease them.

If you have a two-parent family and one parent is the primary caregiver, not working outside of the home, your instinct might be that since there’s no salary to replace, there’s no need for life insurance on the primary caregiver. But remember that if that parent is no longer there, you may have to pay a caregiver.

Create a Special Needs Trusts

Naming your child or a special needs individual as beneficiary of a life insurance policy may affect government benefits received now or later. It might put his or her income level over the eligibility limit for government benefits such as Supplemental Security Income (SSI)1 or Medicaid2. The most common way to avoid this scenario is to create a Special Needs Trust (SNT). You name the SNT as the beneficiary of the insurance policy with a trustee to manage the funds for the special needs individual. There are different kinds of SNTs, so you should have an attorney who understands the laws that apply to special needs set up the trust.

Insuring the Life of the Special Needs Individual

Assuming they would qualify, purchasing a life insurance policy on the special needs individual’s life is another approach to provide income later in life. In certain kinds of insurance policies, cash value accumulates3 over time, which could be accessed to provide for your loved one, so consider purchasing it as early in their life as possible. Usually this arrangement is set up so that a Special Needs Trust, funded by your family’s contributions or the death benefit of a policy on your life, owns the policy, pays the premiums, and is the named beneficiary. A policy on the life of the parent/caregiver can also be used to fund the trust and proceeds from the policy would continue the care of the special needs individual.

The Value of an Irrevocable Life Insurance Trust

There’s another way families can provide financial support, and avoid tax liabilities and estate tax issues for their special needs child: Consider setting up Irrevocable Life Insurance Trusts (ILITs, sometimes called Crummey Trusts) with special needs language. This tool can be used by families of any income level.

Two trusts would be created; one on husband and one on the wife. The trusts would own the policies, pay the premiums, and be the named beneficiaries. This dual method ensures that all family members are protected, with funds made available to the surviving spouse and the proceeds for the special needs child can be put into a special needs trust. The goal is to provide financial support without having proceeds end up in the estate assets. Working with an experienced attorney and Financial Professional can help you through the process of establishing an ILIT.

Don’t Wait to Start Planning

Using life insurance to plan for a special needs individual’s future may seem a little overwhelming, but it’s important not to wait too long. The younger you are the more affordable life insurance can be. And, of course, a serious problem or loss could affect your family at any point. With proper planning you know that your loved one will have a sound strategy in place for the rest of his or her life.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.


1 For information about SSDI go to Information is available by telephone, mail, in person at an office. The toll-free number is 1-800-772-1213.

2 For more information regarding benefits provided by Medicare or Medicaid (Medi-CAL in California) visit Medicaid guidelines vary by state. Contact your local Medicaid office for details.

Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.