Special Needs Children requires support for day to day care even after adulthood. This life-long dependency increases concern for parents knowing that they might not be there for the lifetime. Life insurance is an important element of Special Needs Financial Planning to fund this lifetime care.
Buying Life Insurance by such families demands a careful planning. There can be many legal issues involved considering the child may never be in a state of making decisions. Any mistake in making the child a direct beneficiary can deprive him/her of future benefits.
There are many types of life insurance plans which can be considered for meeting various requirements. But for a special needs child family the selection requires the same importance as other financial consideration. Pros and cons of each plan need to be understood in detail before making any decision.
Following category of life insurance plans are pitched by advisors for meeting the needs of the child at various stages. But any insurance has to be considered only after analyzing specific requirements.
Whole Life Insurance
These types of life insurance plans have benefit of providing funds at any time during the life of the parents. Since the maturity age in these plans is very high, whole life plans has been very successful in estate planning in various countries. It can be a good source of funds at later years of life.
Disadvantage: In India, we are yet to see low-cost whole life plans. Also, the time horizon required for building the cash value is very high and traditional plans do not fetch higher returns. On other hands, ULIPs have exposure to various markets which can fluctuate cash value heavily and requires expertise to derive the benefits.
Undoubtedly, the cheapest form of life insurance which can meet the fund’s requirements when you are not there. How the proceeds will go to the special needs child benefit have to be planned in consideration with legalities involved.
Disadvantage: There will be situations when parents will outlive the term of the policy. Some companies have an option of converting term insurance into a savings plan in last few years of the term. But maturity benefits should not be a deciding factor for buying an insurance policy. In all probabilities, a term insurance is the best means to plan for the financial needs in case of contingencies.
Joint Life Policies
These types of policies insure mother and father in one policy. In case of demise of either one 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 have to consider the real benefit which will be available to the surviving spouse to meet the needs of the special child.
There were policies like Jeevan Aadhar and Jeevan Vishwas from LIC which specifically catered to handicapped dependents. Jeevan Aadhar was a limited payment whole life policy. It provided 80% of the amount as an annuity to the beneficiary after the death of the policyholder. Contrary to this Jeevan Vishwas was an endowment assurance plan which also provided same benefits as Jevaan Aadhar. The major difference between the two plans was that Jeevan Aadhar doesn’t have a maturity since it was whole life policy and so was beneficial in building a higher cash value for later years of life. Both these plan on death and on maturity provided amount partly as lump-sum (20%) and rest as an annuity to the beneficiary. These plans are withdrawn from 1st January 2014.
Disadvantage: Both these policies were traditional plans so premium payout was higher. The bonus payout is high in Jeevan Aadhar (Rs 100 per 1000) as compared to other traditional plans but is there until a specific age. Also, annuity rates in India are very low and are not linked to inflation. But, combined with a term plan, such policies are beneficial in providing regular funds to meet ongoing expenses of the special needs child.
Thus, life insurance planning is a complex issue in case of special needs children families and need to be planned carefully. A common mistake like choosing a general child policy and making the special child as direct beneficiary jeopardizes the child future as he/she may not reap the benefits due to the life-long disability. Also, unlike US, insurance companies in India except LIC have not recognized the special needs planning yet. A Financial Planning approach helps in estimating the future expenses based on the child-specific requirements and selecting the right insurance plan for dealing with contingencies.