Monday, September 12, 2011

Financial Planning for a Special Needs Child

For most parents, financial planning consists of a few predictable but key items.  First, and most importantly, you draw up a will to make sure that you get to choose the people who are going to take care of your children and manage their affairs.  Next, you buy some form of life insurance to make sure that your family has the funds to get if something unthinkable happens to you.  Finally, you put aside some money each month in some sort of college savings plan to help your child pay for a higher education.  The playbook is pretty standard for most parents.  However, what do you do if you have a child with special needs.

You see, I have been thinking about this question because I have a daughter who is special needs.  She is autistic.  Autism (or more formally autism spectrum disorder) manifests itself differently in every child.  There is a quote I once heard which goes something like this, "If you've met one person with autism, you've met one person with autism."  In my daughter's case, she is non-verbal, does not respond to social cues, exhibits repetitive behavior, has both gross and fine motor delays, and has hyposensitivity to sensory stimuli.  However, she is a wonderful child with lots of spunk and personality, but in her own unique way.

One thing that I've been thinking about recently is what is going to happen to her once my wife and I are gone.  With most children, you only have to answer this question for the first 20 or so years of a child's life.  After that, you assume that your child will be able to take care of himself or herself.  However, in my daughter's case, there is a possibility that she will require care and supervision for the rest of her life.  That means that we will not only have to provide for her until she is 20, but until potentially until she is 80.  That requires a different type of financial planning than what you would do for a regular child.

To be honest, this is something that my wife and I really haven't started thinking about.  We've been so focused on getting her the services that she needs (physical therapy, occupational therapy, speech therapy, etc) that we haven't had time to think about the long term.  I am by no means an expert on the subject, but here is what I have gathered so far.

1. It is key to keep the assets in your child's name small.

If a special needs adult has more than a certain amount of assets in their name, they are disqualified from receiving certain government benefits such as Medicaid.  Therefore, it makes sense to think twice before making your special needs child the beneficiary of any life insurance policy or retirement plan.

2. Set up a special needs trust for your child.

Because you can't leave money directly to your special needs child doesn't mean you can't leave your child out in the cold.  Instead, you can set up a special needs trust, which is a financial account set up for your child's benefit, but which is not counted as part of your child's assets.  Instead of leaving an inheritance to your child directly, you leave it to the trust.  Then the person responsible for the trust (usually a trusted friend or family member) can use the money for the benefit of your child.  The other benefit is that your child may not have the mental capacity to manage this money properly, so it allows his or her financial affairs to be managed by a capable person.  There are some restrictions for what you can use the money, but generally it can be used for extras which are not provided by government services.  Obviously I am not an expert in this area, so you should consult one before you do anything.

3. Consider permanent life insurance.

Remember when I said that most people should consider only term life insurance.  This could be a situation where the other types of insurance are applicable.  In most cases, people require life insurance only during their earning years.  This is because once you hit retirement, you're retirement is paid for and your kids are out of the house, so if you meet an untimely death, your spouse and children won't need the coverage at that point.  Therefore, term insurance covers your needs nicely.

However, in the case of a special needs child, you might want to have life insurance coverage for your entire life, rather than just until you retire.  The premium of term insurance jumps significantly once the "level term" period expires.  For many people, that jump in premium puts the coverage out of reach.  One way around this problem is to buy whole life insurance.  Initially, the premium of whole life insurance is higher than term.  However, the premium you pay in year one is the same as the one you pay for the rest of your life.  Therefore, there are no unexpected premium resets.  Therefore, keeping the insurance in force for your entire life is much easier.

I have also read more "exotic" life insurance strategies, like buying universal life to maximize your insurance amount.  Another is to buy what is called joint life policies, which pay only after the death of both you and your spouse.  The advantage here is that the premiums are less than a traditional policy because you are covering two people instead of one.  Since your child might only need the money when both parents are deceased, this could make sense.

Of course, no matter which type you buy, you should think about leaving the money to a special needs trust instead of your child directly (see above).

There are many challenges to raising and caring for a special needs child.  Because you focus so much on the day-to-day stuff, sometimes you neglect the long term planning.  However, the long term is just as important, if not more so, because you won't be around to implement your plan.  Therefore, you need to be as prepared as you can so your child's needs will be met.  I am going to continue to explore this area of financial planning so that my daughter will be taken care of when my wife and I are gone.


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