Harry Potter fans know that Harry’s house was protected by an unbreakable charm. He was safe from frightening foes as long as he was inside the protection. Harry did not know about the protection until he was close to being an adult, but the protection was in place all the same.
As parents of children with special needs, we want to do everything we can to protect our family member with an intellectual or developmental disability. We advocate at schools for fair treatment. We spend hours in therapies and at medical visits. We find ways to create social and community opportunities for our family members who may not be able to make arrangements on their own.
We need to own life insurance. We need to own enough life insurance to provide protection for all of our family members in the event of the untimely death of a parent, caretaker or provider.
As a financial planner and wealth manager working with families like mine, I get asked the same questions many times each year, “Did I buy the right type of life insurance?” and “What type of insurance should I buy?” and “How much should I get?” These are simple questions and most of the time there are simple answers. Yet, families get confused as there are so many types of policies on the market sold by many different types of insurance representatives.
The basic concept of life insurance starts with the desire to take risk out of a family’s life. We use small dollar premium payments to create a pool of money in the event of an untimely death. This is the purpose of insurance at its core. Health insurance. Disability insurance. Car and home insurance. In all cases, we pay monthly premiums to protect ourselves in the event of a catastrophe. Car insurance replaces the car or pays to get it fixed. We cannot afford to rebuild a home lost to fire – the homeowner’s insurance is in place to do that.
Life insurance should be the same. We should use it to cover potential losses at those times where the losses are otherwise unaffordable.
My financial planning process for families with special needs member is called Blueprints. There are key Building Blocks to follow designed to help you provide the best life possible for your family member with special needs: 1. Take time to dream about the future. 2. Prioritize your goals. 3. Organize your financial life. 4. Meet with an attorney to put a special needs trust in place. 5. Get out of debt. 6. Build financial stability. 7. Buy life insurance. 8. Invest for the future and 9. Fund a trust.
Families working through the Building Blocks must focus on protection while building a strong financial life. Families like ours must think about caring for our family member with special needs even after we are gone. We must buy the most insurance affordable for the least amount of premium to cover lost income.
Think about the moment of loss if you were to pass away. Family members need to grieve. They have to have time to handle the emotions of loss. The fear and uncertainty get worse when they face financial misery. Life changes enough when a loved person dies. That stress just gets worse if there is not enough money to continue to pay rent or mortgages, to put food on the table and to pay for therapies, medical visits and the activities of daily life.
Our families have a greater need to have insurance in place than typical families. People with developmental disabilities do not have the same opportunities for independent living and employment as do others. We expect to pay more for our family members with special needs over their lifetimes than we do for our typical family members. We need to save and invest today to pay for those expenses in the future. Life insurance covers the giant hole left if we pass away before creating enough assets to pay for those future expenses.
There are five main reasons to buy life insurance:
- To replace income
- To pay off debts
- To fund future special needs expenses
- To fund education accounts and other life goals
- To provide estate tax liquidity
Life insurance covers the economic loss incurred by families when a spouse or partner dies. The first reason above is the most important and is the main factor used in deciding how much insurance to buy. The remaining reasons are outcomes of using life insurance proceeds to substitute years of planning and investing.
How much to Buy?
How big is the financial hole you leave behind if something happens to you tomorrow? Most of us have no idea of the true economic value we bring to our families each day. The average household in the United States made $52,000 in 2013 according to the Census Bureau. That is more than $2,000,000 earned over a 40 year work history.
There are a few simple steps to take to determine the amount of life insurance coverage you need for your family.
- Multiply family take-home pay by the number of years that person expects to work.
- For a stay-at-home parent, add all the jobs that would have to be replaced if someone had to be paid to do them. The working spouse in this family needs to continue to work if the stay-at-home spouse passes away. List day care, transportation, respite, home activities and other needs to be replaced. Estimate the cost of each and the time period these would need to be paid. This is the starting point of life insurance for a stay-at-home spouse.
- Decide if you want to fund other accounts – like a special needs trust, education accounts or others. Estimate what expenses and for what number of years.
These steps provide a basic outline of the amount of coverage needed on each member of your family. A more detailed review includes expected future rates of return, tax calculations, other financial goals and other support.
What type of policy?
There are two main types of life insurance: term insurance and “permanent” insurance.
Term insurance covers you for a specific period of time – a term. You pay a premium and hope you do not need the insurance during that time period. Some people call this “pure” life insurance. You pay for the death benefit only.
Permanent insurance mixes the “pure” life insurance of term with an “investment” account. Part of the premium goes to a “cash value” account that is similar to a savings or investment account. There are several types of these policies that I call Potential Cash Value policies, PCV for short. PCV policies break into three main types: whole life, universal life and variable universal life.
Many of the PCV policies are sold with the intention of funding a special needs or supplemental needs trust. This is one of many techniques families have to fund the trust. Houses, investment assets and retirement accounts can all be used. Each method of funding the trust has different benefits and drawbacks. Make sure you consult with each member of your tax, legal and financial planning advisory team before dedicating any specific asset to a special needs trust.
Term life insurance is the purest form of life insurance. The insured applies for a certain death benefit then goes through an underwriting process where health and lifestyle history are reviewed. Once approved the policy owner pays a premium each month or year until the end of a certain time period (the term). This is similar to home or car insurance – you pay the premium in the hopes it is never needed.
This is the place to start. Term insurance provides the most coverage for the least cost. The key quality of term insurance is affordability over a specific time. Families focused on getting out of debt, building emergency funds and investing for the future do not need PCV policies. They will create enough assets in the future to fund their goals.
Families must be able to answer “yes” to the following questions before even considering PCV policies:
- Is all your debt paid off?
- Are you fully funding retirement accounts?
- Are you accelerating your mortgage payments?
- Do you have three to six months of cash reserves?
My experience with clients is that they run into trouble if they buy something other than term and cannot answer “yes” to the above questions. Their financial lives are not stable enough to afford the higher premiums of the other types of life insurance.
If the answers are “yes”, families can review the other types of policies. These policies should only be reviewed after you have taken the other steps in the Blueprints process – meaning you are out of debt, have emergency funds and saving for retirement. They should only be bought if you understand the way they work and how they compare to an investment account in expected return and cost.
Insurance products – life, health, disability, long-term care, home and car – reduce the risk of huge mistakes. You know your family will survive in their financial life by having a safety net in place.
Remember, life insurance is not for you. Life insurance protects every member of your family. In the process, you do something for yourself. You reduce the stress and anxiety of not knowing what happens to your family if you pass away. In our world, we do not have magic wands to place protective bubbles around our children. Term life insurance and a healthy financial life are a start.
ABOUT THE AUTHOR
Robert Wrubel, CFP®, AIF® works with individuals, nonprofit organizations and businesses on financial planning including asset management and asset protection, special needs planning, wealth transfer and retirement plans. Rob is a parent of a daughter with Down syndrome who works with families across the country helping them implement financial plans that take into account the unique and challenging issues they face. Rob is a sought-after speaker for special needs organizations. He’s delivered workshops and talks to organizations serving people with Down syndrome, Fragile X and other disabilities. Rob volunteers his time through his direct support of several organizations in the Colorado Springs area. He is Senior Vice President, Investments Cascade Investment Group, Inc.