When purchasing life insurance for a child with special needs, an assumption is often made that a high coverage amount is necessary since he or she may need support long after the parents pass away.

However, a  meeting with a financial professional may reveal this isn’t always the case. This is an instance where excess coverage could be a bad thing. Too much income could disqualify the beneficiary from receiving government benefits such as Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), Medicaid, vocational rehabilitation or subsidized housing.

Be aware that a special needs beneficiary cannot own more than $2,000 in assets to qualify for federal needs-based assistance. A financial professional can help determine whether the child, or the person who will be responsible for caring for them, should be named the life insurance beneficiary. It may also be prudent to work with an attorney to establish a trust for the beneficiary to help preserve benefits and protect against the possibility of a caregiver’s financial mismanagement.

Here are a few options available when planning for a special needs child:

  • ABLE Act — The Achieving a Better Life Experience Act was signed into law in 2014. The ABLE Act authorizes states to establish a new category of savings programs specifically designed for people who are diagnosed with a qualifying disability before age 26. These savings programs are funded through the use of investment accounts that grow tax free, and the money can be used for the beneficiary’s disability-related purposes, including basic living expenses. Assets held in these accounts do not impact Social Security or Medicaid benefits as long as the account balance does not exceed $100,000. It is not yet available in all states.1
  • SNT — This stands for “special needs trust.” There is no high-balance restriction and funds distributed from the trust may benefit the special needs beneficiary, but distributions are taxed as income. It, too, preserves public benefits.2
  • Structured Settlement — This type of payout is common when disability occurs due to an accident and the liable party must pay out a steady stream of income throughout the beneficiary’s lifetime. However, this type of payout can jeopardize public benefits and is therefore often transferred into another vehicle, such as a special needs trust.3

1/2 Scott Suzuki. Parentingspecialneeds.org. January/February 2016. Pages 36-37. “ABLE account or Special Needs Trust.” http://magazine.parentingspecialneeds.org/publication/?i=288152#{“issue_id”:288152,”page”:36}. Accessed Feb. 3, 2016.
3 Jay Kearns. Special Needs Alliance. 2016. “Structured Settlements and SNTs.” http://www.specialneedsalliance.org/structured-settlements-and-snts/. Accessed Feb. 3, 2016.