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Purchasing Life Insurance for a Dependent with Special Needs

2019 June 10
by zanderins

Many families with special needs dependents consider using term life insurance in conjunction with a special needs trust. The special needs trust would be, in many cases, established by your will, funded initially by a term life policy. There is sometimes an argument of whether to buy a term life policy or cash value life insurance, and Dave still feels that term life is the only way to go. The basic premise for cash value plans is that you will need life insurance your whole life, so the plans overcharge you in the early years to pay the higher costs in the later years. Dave’s opinion is that, if you buy term life insurance, you avoid this overpayment period and use the savings to attack debt and to build savings. With 15 or 20-year level term insurance you have time to eliminate your debt and grow your savings so you no longer need life insurance.


Determining the amount of coverage would be similar to the regular process he discusses, in that you need to measure the amount of funds that would be needed to support your dependent per year and then multiply that amount (typically by 10) to represent the amount of coverage to purchase.  For example, if they needed $30k a year to maintain their assistance and address future needs, then an amount of $300k in life insurance (which invested at 10%) would generate those needed funds.  Some people utilize a lower interest rate return, which would increase the multiple of used.  Since Term life is so much cheaper than a cash value plan you would be investing/savings the difference for the 20 or 30 year period of the life insurance so, at the policy expiry, the savings is now used to address their ongoing needs.