Life Insurance for Parents with Special Needs Children

Life insurance can insure the future
of your child with special needs

The Canadian Ministry of Employment and Social Development reports that 202,350 Canadian children had a disability in 2006, which accounts for about 3.7% of children between the ages of zero and 14 — interestingly, more boys (4.7%) than girls (2.7%).

For the parents of these children, the “special” in “special needs” has a pretty large downside that is barely talked about. Many of these children require 24/7 hands-on care and close monitoring. They do not hit the developmental milestones other children do, or they hit them at a much slower pace. 

While their parents absolutely love their children and would do anything for them, many don’t talk about the anger, despair, and hardship that comes with the very taxing demands of raising a child with special needs.

In many cases, these children will never be independent or self-sufficient and their parents will find themselves raising their children into their own retirement years and their children’s adulthood. These children’s needs are very expensive and ongoing, so if one parent or the other were to pass away, a real burden can be placed on that child’s future, especially with so many astronomical costs associated with their care.

This means that a life insurance plan for parents with special needs children requires more planning and consideration than just purchasing a regular term insurance or permanent insurance plan, as the money will have to last for the child’s entire life.

Plus, if the child is receiving any income support from their provincial government, such as the Ontario Disability Support Program, any significant assets over the provincial limit a beneficiary can carry (amounts vary by provincial program) will disqualify them from receiving the income support at all. The thought is they will be able to survive on their inheritance or investments alone, which is often far from the case.

This means you will need to set up any financial support so that it doesn’t count against your child’s asset total according to the provincial government program providing income support. There are a variety of ways you can do this.

In Canada, there is a fund available from every major bank and provided by the government called the Registered Disability Savings Plan. As long as the child with a disability qualifies for the disability tax credit, they can get an RDSP, and any money that is put in either by the account holder or on behalf of the account holder is not only matched by the government, but is also exempt from counting your child’s assets when calculating their provincial income support cheque.

This is a great option for their later life because the government will match your contributions with either a Disability Savings Grant of up to $3,500 annually on your contributions, or up to $1,000 year as part of the Disability Savings Bond for low-to-modest-income account holders, or both. The $1,000 bond contribution is made every year, regardless of whether any other money is contributed to the account that year.

The money can be invested in a variety of different ways, including mutual funds, bond funds, and GICs, but it can only be accessed without penalty once the account holder turns 60. The money can be accessed after the account has been held for at least ten years, but if money is taken out, the last bond or grant given to the account must be paid back.

The Registered Disability Savings Plan is a great way to insure your disabled child’s future past their retirement age, but what about before that into their adulthood?

Setting up a trust also will not affect any other income support your child receives, as trusts are exempt from any kind of income benefits calculation. A trust is a legal entity that owns assets, be it savings, stocks, property, or benefits paid from a life insurance policy. A trustee manages the assets (such as investing them or dispersing them) and is not allowed to personally benefit from the trust. Your child also doesn’t directly own the assets, so that is why trusts are exempt and eligibility for any other income benefit they are receiving.

However, if you are setting up a trust for a child with special needs, you have to be careful about how the trust is structured. Depending on who manages the trust and how the money flows, it may be considered income and may disqualify them from income benefits. Here are some mistakes you don’t want to be making:

  • Granting assets directly to the child from a parent, grandparent, or other relative. This may disqualify them from government benefits and they may not be capable of managing their own assets anyway.
  • Naming the child as beneficiary of the life insurance policy, annuity or retirement plan. This also can disqualify them from government benefits.
  • Directing the child’s inheritance to another family member to manage on behalf of the child. These assets would then be subject to any bankruptcy, divorce, creditors, seizure, or litigation against the assets’ owner, or the owner may die before the child, in which case the assets would be subject to the terms of the owner’s will, which may not feature the child.

Many parents mistakenly believ they don’t have enough money to establish a trust because they must establish a huge nest egg of savings for expenses. What these parents don’t realize is that they can fund a trust with a life insurance policy as long as they are careful about what the trust is used for.

If the trust is paying regularly for food and housing costs, or paying money directly to the special needs beneficiary that can be a problem, the money could be viewed as income and result in a loss of government benefits that way. Don’t use a trust for food, housing, property taxes, home insurance, utilities, or direct cash.

There are a number of trusts that are options for special needs children, each with their own features.

Third-party settled trust – This is the most common type of trust. It is designed to qualify the child for government assistance while providing for quality of life, such as travel, a specially equipped van, home health care, or personal support workers.

General support trust – Provides for all general support of the child, but disqualifies them for any assistance.

Self-settled trust – This is a trust created by the child with a disability with their own funds so they can disperse the funds themselves. However, if they also take government assistance, the assistance must be repaid with assets left in the trust after they have died.

If you are funding a trust through a life insurance policy, there are also a number of advantages and disadvantages to be aware of, depending on the life insurance policy you choose.

Term life insurance

Pro: Term life is the cheapest way to insure a parent’s life. It is a good choice for short-term needs.

Con: It is likely the parent will outlive the term of the policy, leaving a trust short of money. If you already have a term policy and need to fund a special needs trust, you could consider converting your term policy to a whole life insurance policy with the same insurance company.

Whole life insurance

Pro: A whole life policy could provide funds for a special needs trust no matter when the parents pass away. Universal life and variable universal life insurance are also options.

Con: A variable universal life policy builds up cash value but needs time to weather volatility in the markets. Since the cash value is attached to an equity market, the policyholder needs enough risk tolerance to ride the ups and down that usually affect the cash values and premium payments.

Survivorship life insurance (also called “second-to-die”)

Pro: This type of whole life policy insures the father and mother in one policy and pays out upon the death of the second spouse. It is cheaper than buying two separate life insurance policies on each parent.

Con: At the death of the first spouse, figure out whether the surviving spouse will have enough money to live on without a life insurance death benefit. Will they be able to maintain quality of life for themselves and dependent children? Will they be able to keep up the premium payments on the survivorship life policy?

If you require more information on which life insurance policy is appropriate in protecting the future of your special needs child, call us at 1-866-899-4849.

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