Life insurance can be a versatile tool when developing a plan to provide for a family member or loved one with a disability or special need. Life insurance allows families with sometimes limited financial resources to make incremental premium payments that leverage their resources and provide a large death benefit. Also, if properly owned, the death benefit may not affect the desired beneficiary’s ability to continue to receive government benefits, such as Medicare and Social Security disability income. (See also: What’s the Difference Between Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI)?)
Who Could Benefit?
There are many reasons why parents or grandparents buy life insurance to help provide for family members. Some common situations include:- A physical disability that prevents an individual from working or being able to earn enough to provide for their needs.
- A child or grandchild with a physical, intellectual and/or emotional disability who will need assistance throughout their life.
- A family member who has an addiction problem or the inability to properly manage their financial resources upon the insured’s death.
Why Buy Life Insurance?
Life insurance is a unique financial product in that it allows the policy owner guaranteed liquidity in the event of the death of the insured.Life insurance can also provide:
- A guaranteed death benefit that does not fluctuate in value like most other investments or assets, including real estate.
- An income tax-free lump sum upon the death of the insured (and estate tax-free if properly owned).
- The ability for families to leverage limited resources
- Greater freedom to spend down assets as needed while alive; knowing a lump sum will be immediately available upon the insured’s passing.
- A way for parents to help equalize distributions among their children
What Kind of Life Insurance?
Generally, in these situations, a permanent policy with a guaranteed death benefit, such as auniversal life with a no lapse guarantee rider or a whole life policy, is recommended. However, a 20 or 30-year level term policy can be used; knowing that the term will have to be converted to permanent coverage at some point in the future. The term policy should include a rider that allows for conversion to a policy permanent through age 65.(See also:What is a Convertible Insurance Policy?)The coverage can be an individual, survivorship or combination of individual and survivorship policies. A survivorship policy (sometimes called second to die) which often has a lower premium, insures two lives and only pays a death benefit upon the second passing. Many people use a combination of individual and survivorship policies to provide liquidity upon both the first and second death. This can be important, for example, if one spouse died prematurely at age 55 and the surviving spouse, who was still supporting a handicapped child, lived to age 95 or 100.
How Should the Life Insurance be Owned?
A life insurance policy has three parties – the owner, insured and beneficiary. In these situations, it is best for a policy to have the same owner and beneficiary. Otherwise, there can be taxable gifting issues if the owner transfers a large lump sum to a trust or another party upon the insured’s passing.To avoid taxable transfers and help ensure the death benefit is also excluded from the owner’s gross taxable estate the life insurance policy could be owned by another family member, trusted friend, or an irrevocable trust. The individual or trust would also be the beneficiary. The policy premium can be paid each year by the insured or owner using gifts and if an irrevocable trust is involved, a Crummey letter. (See also: The 7 Reasons to Own Life Insurance in an Irrevocable Trust.)
However, many advisors do not recommend having a family member or trusted friend own the policy. The reason being if they become involved in a lawsuit or divorce settlement and, depending on state regulations, the policy cash value and/or death benefit could be attached. An irrevocable trust, which is a separate entity, can help protect the policy cash value and death benefit for the desired beneficiary.
Unique Needs Trust
Numerous folks or grandparents make a unique needs believe (a sort of unalterable trust) to give particular advantages to an incapacitated or rationally sick recipient who is accepting government advantages and/or can’t deal with their own particular funds. The trustee, who can be another relative or an outsider, is conceded particular forces, for instance—restricting appropriations to guarantee a recipient does not lose any administration advantages or to give a set wage, with constrained access to extra sums, for a tyke with a betting or medication issue.Unique needs trusts are normally intended to last until the recipient’s demise or every one of the assets in the trust have been appropriated. On the off chance that the recipient passed away before every one of the benefits were dispersed the rest of be conveyed as plot in the trust to different recipients.
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