Ensuring Financial Security for a Child With Special Needs

Parents and caregivers of children and dependents with special needs understand that their lives may not play out exactly as expected. Adjustments must be made over the time to ensure that their children get the best care and the right interventions, and are protected financially. One important part of parenting a child with special needs is ensuring your child is cared for through your retirement and beyond. Figuring out how to provide for your child when you are no longer around can seem overwhelming, but there are steps you can take now to protect their future financial security and quality of life.

The first step is to evaluate the needs of your child.

• Will you need to appoint a guardian to make legal, medical, and/or financial decisions on behalf of your child once you’re no longer able to do so?
• Will your child need to live in a specialized care facility, or can they live on their own?
• Does your child need a home-care nurse or personal care assistant? If yes, does this involve round-the-clock care or a certain number of daily visits? Are their needs likely to change in the future?
• Can your child earn any of their own income or are they entirely reliant on your support?
• Does your child require any specialized equipment or medications that are not covered by their health insurance in full or in part?
• What costs will your child accrue on a day-to-day basis? On a month-to-month basis? Are those costs likely to increase over time?

Once you have an idea of your child’s financial needs, the next step is to figure out how you are going to fund their financial security. Generally, there are three main options.

1. Purchase a permanent insurance product. Whether whole life or “properly” funded universal life insurance, the death benefit is there from day one and can cover your final costs, including funeral expenses, outstanding debt, and estate taxes. But it can do more than just cover your final financial obligations. By designating your child (depending on federal benefit considerations) or a special needs trust as the beneficiary on your life insurance plan, you can guarantee them a source of income after your death. Instead of directing your insurance company to provide a lump-sum payment, you can specify that the death benefit be paid to your child over a fixed period of time (typically one to 30 years) until the benefit is fully paid. If your child is not financially independent, you can designate a special needs trust as the beneficiary of your policy, and name a trustee to manage the funds on your child’s behalf. Means testing – or a determination of whether your child is eligible for federal benefits – should be considered when deciding if a beneficiary trust arrangement is appropriate, as a direct payout may affect their eligibility.
2. Open an ABLE Account. An ABLE account is a private, tax-advantaged savings account designed specifically for individuals with disabilities. Provided your child was diagnosed with a disability before turning 26 years old, they are eligible for an ABLE account. ABLE accounts have a $19,000 annual contribution limit; contributions can be made by anyone, including family and friends. This money can then be used to cover the costs of qualified disability expenses, including housing, health care costs that aren’t covered by insurance, personal support services, transportation, food, and more.
3. Invest money to build future value. This might involve investing in a taxable brokerage account or purchasing an annuity. Annuities allow you to transfer funds to a life insurance company in exchange for a fixed amount of income over a defined period of time or for the annuitant’s entire lifetime. After your death, making your child (or a special needs trust) the beneficiary of a deferred annuity or the annuitant of an immediate annuity can provide them with a fixed income for the remainder of their life, provided you choose the appropriate payout option. A joint and survivor income payout would guarantee that both you and your child receive payments until your death; after your death, your child would receive a percentage of the original payment amount through the end of their life. Means testing should also be considered with an annuity.

If you will be retiring from the military with an eligible child dependent who is “incapable of self-support” as defined by the Defense Finance and Accounting Service (DFAS), you may be able to have your Survivor Benefit Plan (SBP) annuity placed into a special needs trust. Under current law a child who meets eligibility criteria will never “age out” of the benefit, providing a way for a portion of the retiree’s pension to continue for the child if the retiree passes away. More information about SBP can be found here.

Individuals with disabilities are also eligible for assistance from the government, but there are limitations to this aid.

• The Social Security Disability Insurance program (SSDI) provides benefits to you if you are diagnosed with a medical condition that is expected to last at least one year or result in your death. Benefits may also be available to eligible family members (including a disabled child or an adult child who was diagnosed with a disability before age 22) provided you have worked long and recently enough and have paid into Social Security while employed.
• The Supplemental Security Income program (SSI) pays benefits to adults and children with disabilities who have limited income and resources. If your child has more than $2,000 in assets, they are not eligible for SSI.
• Both benefits must be applied for through the Social Security Administration. Learn more about Social Security disability benefits here.

When planning for your child’s financial future, it is important to consider setting up a special needs trust. Under current law, this type of trust allows your child to receive income without jeopardizing their eligibility for SSI, as assets contained within the trust are not counted by the Social Security Administration.

• The beneficiary of both your life insurance policy and any annuities that you purchase can be the special needs trust.
• Monies received from the trust cannot be used for food or housing if your child is also receiving SSI. They can be used to pay for therapies not covered by health insurance, goods, and services.
• Should you decide to set up a trust, you will need to contact a lawyer and designate a trustee (to manage the funds contained within the trust on your child’s behalf).

Finally, it may help to write a letter of intent containing information about your child’s preferences and routines, and your wishes for their future. In it, you can identify caregivers, doctors, and other people who may be helpful to your child during their transition to a life without you. Include it with your will and store extra copies in a safe place.

Planning for your child’s care when you’re no longer there is a multi-step process: First, determine your child’s needs, then decide how you will fund those needs, taking into account the possibility that government assistance may be available. The most important part of the process isn’t the details of financial planning, though. It’s important that you include your child in planning for their future to the extent possible given their disability. Having an open plan for their transition now can ease the shift in the future.

Navy Mutual annuities are non-qualified annuities, meaning that they must be purchased with after-tax dollars that are not contained within a retirement account. Not available in New York. Interest rates are based on Navy Mutual’s current rate schedule. Rates may change without notice. For current rates, please call (571) 481-2313.

The Navy Mutual blog is meant to provide basic information that generally applies to most situations and should not be construed as legal or tax advice. It is not meant to replace the services of a financial planner, insurance counselor, attorney, or tax advisor. You are encouraged to consult qualified legal and financial professionals for individual estate planning advice. Information contained in this blog post may change on occasion.