How Can I Fund a Special Needs Trust?

A parent with a child with special needs should consider buying life insurance to help fund the special needs trust set up for their support. What may look like a substantial sum to leave in trust today may run out after several years of paying for care that the parent previously provided. The more resources available, the better the quality and length of the support. 

Funding a Special Needs Trust

Special needs trusts can be funded in many ways, including cash, personal property, real estate, investments, retirement benefits, and proceeds from a personal injury settlement. But how can you be sure that this money will last for your child’s entire lifetime and continue to provide the quality of life they deserve? Life insurance can offer another safety net.

What is Second to Die Insurance?

If both parents are alive, the cost of second-to-die or survivorship policies—payable only when the second of the two parents passes away—can be surprisingly low compared to other life insurance coverage. It provides benefits to the beneficiaries only after the last surviving person on the policy dies. Life insurance is often used for estate planning when funding a special needs trust, and has the following advantages:

• Proceeds may be used to offset estate-settlement costs.
• Qualifications to purchase the policy may be less stringent than individual term or whole life insurance because premiums are determined by the joint life expectancies of the parents. 
• It may ensure beneficiaries can afford transfers of significant property—like a family home—rather than creating a tax burden. 

The annual policy premium covers the death benefit. The excess grows tax-deferred, building cash value to cover some or all of the higher premiums as you age.

Why is Life Insurance Important?

A life insurance policy can provide families of children with special needs with a way to prevent future financial setbacks. It offers flexibility by providing adequate support for the child while directing retirement benefits or business investments that may be inappropriate for a special needs trust to other healthy children. Life insurance also allows parents to leave a larger share for the special needs child and smaller shares for their siblings.

Types of Life Insurance

There are many types of insurance policies to choose from and it's important to discuss them with a licensed insurance agent and a special needs planner before determining which coverage to buy and how to use the proceeds to achieve your unique goals. They fall into two main categories:

• Term life insurance offers lower premiums for a fixed period of 10, 15, or 20 years. When the term expires, renewing the policy is usually unaffordable.
• Whole life or universal life policies with a guaranteed death benefit are recommended. The premiums are initially more expensive term policies but remain consistent over the life of the policy. The income generated by the policy can pay some or all of the premium after the policy has been in place for several years.

Learn more about special needs trusts and how to fund a special needs trust with life insurance. Find a special needs planner near you to discuss your particular situation and for advice on how to best protect your family now and in the future.