How to Choose Life Insurance If You Have a Child With Disabilities

Life insurance is important for all parents, but it's particularly critical if you're the parent of a child with disabilities. If you were to pass away, life insurance will ensure your child can continue receiving the care they need, protecting their well-being.

There are many types of life insurance, and the best policy for parents of a disabled child may vary based on your finances, your child's disability and your budget.

Types of life insurance

Being a parent is a significant financial commitment. The cost of raising a child ranges between $200,000 and $450,000. But, if you have a child with a disability, the cost can be substantially higher.

According to Perfectly Imperfect Families, an advocacy organization for families with children with disabilities, the cost of caring for a special needs child can range from $2.8 million to $4.2 million.

That steep cost is a major reason why life insurance is so essential for parents of such a child. If you were to pass away, a life insurance policy can cover the cost of their care.

As you begin shopping for life insurance, you should know there are two main categories of life insurance: term and permanent. While there are some clear benefits to each, it's also important to evaluate their drawbacks as you consider which one is best for you as a parent to a child with special needs.

Term insurance

Term life insurance provides coverage for a set period of time, generally between 10 and 30 years. Your monthly premium is based on your age and health status when you buy the policy, and it's usually fixed for the full term. What's more, coverage is usually much cheaper compared to permanent insurance.

You can decide how much of a death benefit you get through your policy; companies usually offer term life policies with $50,000 to $5 million of coverage.

However, term life insurance has some drawbacks. If you happen to outlive your policy, you'll need to buy a new one. It can be difficult to obtain inexpensive coverage when you're older, especially if you have developed health issues.

You may also consider an annually renewable term policy. It’s an option that extends coverage by one year at a time until you reach a certain age—usually 85 to 95 years old. This type of policy is more likely to give you lifetime coverage, but there's a catch: your premiums increase as you get older.

Permanent insurance

Permanent life insurance can come in various forms, but the best-known type is whole life insurance. As its name suggests, whole life insurance ensures lifetime coverage as long as you pay your premiums.

Premiums are fixed, and a portion of what you pay goes into a cash-value account that grows over time. Once you have sufficient funds, you may be able to borrow a portion of your cash value. If you decide to cancel the policy, you'll receive the cash-value funds minus any surrender fees the insurer charges.

That said, whole life insurance is often much more expensive than term coverage. Depending on the policy you choose, your age and health, a whole life policy can cost 10 times more than a term life policy.

The best insurance if you have a disabled child

Term life insurance is a popular choice for families with disabled children, primarily because it's more affordable. With lower premiums, it may also be easier to obtain more financial protection for your disabled child.

Term life insurance can make particular sense if you believe you'll have enough money and assets in hand in 20 or 30 years to provide for your child's care after your death. The policy allows you a bridge to that time, in the event you die before you’ve accumulated sufficient wealth.

However, that approach won’t work if you don’t anticipate gathering such assets before you die, and it can be risky even if you do. Since term life insurance expires, you may find that you need life insurance after the policy ends, to supplement the assets you have.

Term coverage gets costlier as you grow older, and it can become prohibitively expensive if you develop health issues. If you opt for a policy with a fixed term, you may have a difficult time qualifying for affordable rates on a new policy when that term expires. In some cases, you may become uninsurable. An annually renewable term policy can solve the insurability problem, but its costs can increase exponentially over time.

If your budget has room for higher premiums later on, you may have the option to convert your term policy to a whole life policy. This common type of permanent insurance can last for the rest of your life, regardless of whether you develop health issues. If you end up not needing the policy anymore at some distant point, you can get some of what you paid back in the form of the policy’s cash value.

However, permanent life insurance, too, can be very expensive. That may make it worthwhile only if you can comfortably afford it without impacting any other financial needs, obligations or goals.

Consider a disabled trust

To choose among the life insurance types, consider getting help from a financial planner or insurance professional.

Regardless of the insurance type you eventually select, however, consider setting up a disabled trust and designating the trust, rather than your child, as your policy's beneficiary. There are a few reasons for this:

• Payout requirements: If you name your child as the beneficiary of life insurance while they're still a minor, they won't be able to access the death benefit proceeds until they're at least 18 years old. Additionally, they may be ineligible to receive the benefit if they're incapacitated when you pass away.
• Government benefits: If your adult child receives Social Security, Medicaid or other government benefits, the life insurance proceeds may disqualify them from those programs in the future.
• Fiduciary duty: When setting up your trust, you'll designate a trustee to manage the funds. It's common to choose a family member, but you can also opt for an attorney or another trusted professional. Regardless of who you choose, the trustee has a legal obligation to act in the best financial interest of your child.

If you believe such a trust is right for you, seek out an attorney who has experience in that area. If you're unsure where to start, organizations like the Special Needs Alliance can help.

The bottom line

Providing for a child who has a disability is a top priority for parents, and that imperative often extends beyond your lifespan. As you consider your options, take the time to weigh the advantages and disadvantages of each one, as well as your budget, to determine the right option for you.

Regardless of which type of life insurance you choose, it's a good idea to consult an attorney about creating a special needs trust. Having a trust in place with a reliable trustee can help you make the most of your life insurance policy long after you're gone.