How To Buy Life Insurance For Protecting Special Needs Care?

Life Insurance is the most important element of financial planning but unfortunately is the most neglected one. Not enough people have it and those who have it do not have enough. If you talk about life insurance then it’s the most boring aspects because its start after your death. But accept it that it’s the most important tool to protect your family and reduce stress when they actually need it.

Life Insurance Special Needs

For a special needs dependent family, there is always a requirement to pay more for the special needs care. You might be in a different life situation or at a different age.  But the primary objective is to find the best ways to provide a safe home, a fulfilling life and appropriate care for their family member with special needs.

Though most family plan an emergency fund it only replaces few years of wages that parents are earning now. What about lifetime loss of wages if something happens to any of the parents? Even if few years of the income is lost the impact on finances is devastating. That’s where life insurance kicks in. It builds that safety net which creates a pool of money. This pool can be used each year to keep a house, maintain lifestyle and pay for ongoing medical, therapeutic and recreational expenses. Life insurance can replace the retirement savings that come out of income. The insurance company pays a lump sum to the family that replaces this income.

How much life insurance is enough?

Once you understand the importance of life insurance and ready to buy the other question is how much insurance is enough. There are many rules which have been established for identifying your insurance requirement. Insurance agents from a long time have been using a very simple approach of a defined multiple of current income to advice on the amount of insurance one should buy. The rationale behind such a theory is that if the resulting sum is invested at a particular rate of return, it will earn the same income for the family. For e.g, if annual income is Rs 2 lakh, with the expected future rate of 6%, you need an investible corpus of Rs 33 lakh to earn the same income. This results in buying a term insurance of 17 times of current income. The income multiplier changes with age group and as per your financial situation.

The other approach is human life value. This approach is being used by financial planners globally and is considered estimating one’s insurance needs fairly accurate. Here we calculate the total expected earnings in the future of an individual and discount it with the rate of inflation to get a sum which gives the total economic value of the earning person. The best part of this approach is that when we derive the expected earnings we take income net of expenses into consideration.

The third and most effective approach is a Need-Based approach. An individual has to provide for livelihood and financial well-being of his family which includes parents, especially in India. He has to complete social obligations like children education and marriage, purchase of house etc. and simultaneously has to create an asset not only for himself but which can be bequeathed to the family. The amount of insurance to buy is based on the estimate of funds required to meet the family needs created on death. This rule will include the funds required for special needs childcare which is not ascertained in other 2 methods. Thus the need-based approach is the right method to identify how much insurance you require to meet your family needs.

Factors to consider for buying a term insurance :

Immediate Corpus Required

  • Emergency Reserves
  • Paying off Loans and Liabilities
  • Cover Legal Expenses
  • Generate Lifetime income
  • Meeting Month on Month Living Expenses
  • Child lifetime care
  • Regular expenses for hiring housemaids and servants for self or child care
  • Fees for guardianship, legal and other professionals such as trustees
  • Any additional expenses

Future Requirements

  • Child Care  for older age of surviving spouse
  • Retirement expenses for surviving spouse
  • If a sibling, then expenses for his/her Education and  Marriage
  • Cost of house purchase  if the child with disabilities is going to live separately

Types of life insurance policies

Life Insurance planning for special needs parents demands careful planning as there are many legal issues involved. One of the important consideration is that the child may never be in a state of taking decisions. Any mistake in making the child a direct beneficiary can deprive him/her of real benefits.

There are many types of insurance plans for meeting different requirements. But with a special needs child selecting the right type of insurance is very important as it may be the only resource to fund his/her care in case of parents demise. Pros and cons of each plan need to be understood in detail before making a decision.

Following are the category of insurance plans available in India. Each one has to be considered only after analyzing specific requirements:

Whole Life Insurance: This type of insurance plan has the benefit of providing funds at any time during the life of the parents. Since the maturity age in these plans is high, whole life plans have successfully been used in estate planning in various countries. It can be a good source for funds in the later years of life.

Disadvantage: In India, we are yet to see low-cost whole life plans. Also, the time horizon required for building cash value is very high and traditional plans do not fetch high returns. On the other hand, ULIPs have exposure to various markets which can fluctuate cash value heavily and requires expertise to derive benefits. If early death occurs, then these policies fail to provide the high funds which will be needed for the child care.

Term Insurance– Undoubtedly, this is the cheapest form of insurance which can meet fund requirements when you are not there. How the proceeds will go to the special child needs to be planned in consideration with trust and legalities involved.

Disadvantage: The maximum tenure of a term plan is between 30-45 years depending on the insurer. So if a 35-year old person takes a term plan with the maximum tenure of 35 years, his policy will expire if he lives beyond the age of 70. In case of death beyond that age, the dependent child will not get any money. In normal cases, children are usually independent when parents reach that age, and not dependent on insurance funds in case of an eventuality.   But with a special needs child, the situation is different.

Having said that, a term insurance is still the best means to plan for future financial needs in case of eventualities and at any stage of life. Any fund shortfall can be filled by starting investment early to accumulate the desired assets. Duration of 20-25 years is a good time to build assets for future care.

Joint Life Policies: This type of policy ensures the mother and father in one policy and in case of demise of either, the policy continues with benefit accruing to the other parent. The policies are somewhat cheaper than buying two separate policies.

Disadvantage: Most of these plans are traditional and so the returns are not very attractive to beat inflation.  Parents will have to consider the real benefit available to the surviving spouse to meet the needs of the special child.

Special Policies: There were policies like Jeevan Aadhar and Jeevan Vishwas from LIC which specifically cater to disabled dependents. However, these policies have been withdrawn with changes in 2014. Combined with a term plan, special policies like these are beneficial in providing regular funds to meet ongoing expenses of the special child.

Life insurance planning is a complex issue for families with special children and needs to be planned carefully.  Mistakes, like choosing a general child policy and making the special child a direct beneficiary are common and can jeopardize the child’s future as he/she may not reap the benefits due to the life-long disability. Also, unlike the US, insurance companies in India, with the exception of LIC, have not recognized special needs planning yet.

Having identified the insurance product how much insurance parents need should be assessed. Ideally, the insurance coverage amount should include the child’s lifetime requirement, all liabilities, other members’ requirement etc. The insurance requirement is worked out while drawing the complete financial plan. But it’s not only the breadwinner who needs to be insured.  Even the other parent taking care of the child has an equal role to play and so needs to be covered adequately.

Here is a 5 point checklist for choosing a life insurance policy-

  1. Numbers favor term insurance but your emotions will find policies with cash value attractive. Don’t let emotions govern financial decisions.
  2. Your expenses are already on the higher side. It is difficult to afford the premium of cash value policies and so if you cannot afford both, stick to term insurance.
  3. If early death occurs only term insurance can fulfill high fund requirements. Cash value policies need a long time to accumulate assets. Check how you will cover this risk?
  4. In the long term, you can build assets through investments more efficiently, which can fill the gap created by term insurance discontinuation. Check the difference in premiums and what you can accumulate by investing that difference.
  5. Start early so that you don’t have to depend on insurance for your requirements in the later years of life.
About the Author

Jitendra P.S. Solanki

Jitendra is a SEBI Registered Investment Adviser (INA10000184) and has earned the much-respected professional designation of Certified Financial Planner (CFPCM ) and Chartered Trust & Estate Planner (CTEPTM). He is a post graduate from IIT - Roorkee and has spent 15 years in Financial Services Industry working with leading financial institutions & Banks, advising families on their Financial well-being. Jitendra specializes in advising families with special needs children on various financial & legal aspects.

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