After the substantial response we received from the posting/newsletter on different special needs trusts, I thought it would be valuable to mention a strategy for magnifying the inheritance of a special needs beneficiary. Life insurance can provide a great amount of inheritance for a special needs beneficiary, but only if handled properly. The restriction on providing direct assets to a special needs beneficiary still holds true, whether it is done through a good revocable living trust for you or a separate special needs trust for your beneficiary.
Life insurance can provide a large sums of money for your loved ones for pennies on the dollar, particularly if you start early enough that the initial insurance is inexpensive. But what kind of insurance should you get? There is a large and never-ending debate between the merits of term and permanent insurance. Both have their benefits. “Term insurance is much less expensive, and you can make more money by investing the difference in stocks, bonds or CDs” and “Why throw your money away on term insurance if you don’t die within 20 years? Get permanent insurance so the value stays with you no matter how long you live.” The truth is neither is completely right or wrong. It all depends on the goals and situation.
When looking at life insurance to support a special needs child, more people tend to look at permanent insurance since it will be there no matter what. Many people who look at a large term insurance policy will do so to support children and their education should they pass on while the children are still young. When the children are out of the house and on their own, the need for a large term policy disappears. For most people, that’s fine. It is not OK for parent trying to leave a large sum of money to support a special needs child.
The next question is whether or not having a large life insurance policy would have any negative estate tax implications.