Should you buy whole life for your special needs child?

If you have a special needs child, you’ve probably considered buying permanent life insurance like a whole life policy. Compared to investing, buying insurance is a more costly way to provide future resources for your child, but can make sense for some families. Let’s take a deeper look.

Option 1: Invest in a Brokerage Account

With this strategy, use a brokerage account like you would use a 529 plan. Invest money each month (e.g., $200) for a long time (e.g., 30 yrs) and pick a low-cost, diversified fund like a TDF. If most of your money stays in stocks, it’s not unreasonable to average a 10% return. In the example above, that means your child could have a ~$500,000 pot of money after 30 yrs. When you die, the account shifts into a special trust and the money gets managed by a person of your choice.

People who are disciplined savers, risk-tolerant and want to optimize their money should do this.

Option 2: Buy Insurance

On the other hand, if you desire the psychological comfort of *guaranteed* financial resources for your child, then you can buy a whole life policy on yourself. With this strategy, you'll pay more for the luxury of certainty. Following the example above, a $500,000 whole life policy may require $400 - $800/mo as long as you live. This is 2 - 4x what you could just invest!  And remember, we’re talking about insurance here... you *must qualify* for it.

Still, the major pro with this strategy is there’s no guesswork. What you buy is what your child will get. You don't have to manage another investment account or handle 1099's (tax forms) each year. It's straightforward, but expensive. Before exploring insurance, ask yourself these questions:

  • How much money will my child need? The more insurance you buy (i.e., the death benefit), the more you'll pay.
  • How much will it cost? Your health, family medical history, income, and other lifestyle factors will influence your monthly payment.
  • Can I afford the monthly payment? "Afford" means you can still meet other goals like paying off debt or saving more for retirement.

Regardless of the strategy you choose, you’ll need to set up a Special Needs Trust so that your child is not expected (or given the power) to manage the money you’ll pass onto him/her. A trust allows you to appoint a special person (sibling, family member, lawyer, etc) to distribute money for your child’s needs.

Setting up a trust isn’t complicated. A 1-2 sentence clause placed inside your Living Will is all you need. You just have to get your estate planning documents done. You can do this online, or hire an attorney. Ultimately, the option that's right for you comes down to your FUEL. And remember, you don't have to break the bank to lock-in a safety net for your child.