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Whole life insurance for special needs child?

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  •  Bob Jones 
    Participant
    Status: Physician
    Posts: 3
    Joined: 12/03/2018

    I spoke with a financial planner and they were pushing whole life pretty hard. I have a special needs child that will be significantly or completely dependent on their inheritance for survival. The whole life policy seemed pretty weak. The idea of laying out $50k a year for an investment with a 3-4% return (pre-fees) that has an 80-90% probability of having zero value (80-90% of all whole life policies are surrendered) seemed like a bad deal.

    Then, I’m reading the WCI page “12 Questions to Ask Before Purchasing Whole Life Insurance”

    https://www.whitecoatinvestor.com/12-questions-to-ask-before-purchasing-whole-life-insurance/

     

    In paragraph #1, it states: Another example might be somebody who will never be financially independent but has a special needs child depending on his income.

    However, I don’t see any real explanation on this. Was hoping to get some more specific information on why this would be a better idea in my situation from someone other than the person salivating over the commish.

     

    Thanks.

     

     

    #171313 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 992
    Joined: 03/27/2017

    I’d look into a 529 ABLE account and a special needs trust.

    #171334 Reply
     Crockett’sRiver 
    Participant
    Status: Physician
    Posts: 129
    Joined: 05/24/2018

    Whole life/universal life is often recommended to families with a special needs kid as a savings vehicle and tax shelter.  The idea is that parents need to prioritize building up assets that can used to care for a dependent child after the parents’ death, over other investment goals (such as retirement for parents, building a business etc). The pitch from the whole life insurance companies is that the policy provides a known benefit and is passed on income- and estate-tax free. For some lower-income families or families that have a hard time saving and investing on their own, this may be a good way to go.  However, as has been stated here many times, the combination of insurance + investments isn’t generally a great product. And unless your estate will trigger the estate tax ($11 million in 2018) this doesn’t need to drive your planning.

    You would probably be better off investing the money in low-cost funds and establishing an ABLE account and a special needs trust. You will need to structure these so that you don’t jeopardize your kid’s eligibility for programs such as Medicaid.  There are fee-only planners who specialize in special needs:

    https://specialneedsanswers.com/USA-special-needs-planners

    You might want to look at term insurance on the care-giving parent, if one of you has left work to take care of your kid full-time.  This usually isn’t recommended for a non-earning spouse but can be important if one of you does a lot of work that would need to be replaced if case of your early death.

    If you haven’t read it already, I recommend The Special Needs Planning Guide (Nadworny and Haddad).  In fact, if you want to PM me your address I can send you my copy.

    Career and finance for PCPs at ADoctorsWorth.com

    #171454 Reply
    Liked by Hank, jfoxcpacfp
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6148
    Joined: 01/09/2016
    In paragraph #1, it states: Another example might be somebody who will never be financially independent but has a special needs child depending on his income.

    Click to expand…

    This is referring to someone who does not have the means to save as much as most physicians can. These Q&As seem to be written for a broader scope of readers than HIPs (although I have to admit I’m still a little confounded by the advice).

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #171463 Reply
     Tim 
    Participant
    Status: Accountant
    Posts: 600
    Joined: 09/18/2018
    I’d look into a 529 ABLE account and a special needs trust.

    Click to expand…

    Using term life to cover any gap that you may find. The difficulty in this is still providing for your own and spouse’s needs and building two “retirement” funds with different purposes.

    That is the purpose for the term insurance.

    #171472 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 992
    Joined: 03/27/2017

    Sorry, I presumed the original poster already had sufficient term life insurance and an adequate own occupation disability policy.  If not, he should get those in place pronto.

    #171483 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 3717
    Joined: 05/13/2011

    I spoke with a financial planner and they were pushing whole life pretty hard. …. 80-90% probability of having zero value (80-90% of all whole life policies are surrendered) seemed like a bad deal.

     

     

     

    Click to expand…

    No you weren’t. You were speaking with an insurance salesman.

    At any rate, some people may have a need for whole life insurance because they have special needs children. But even then, it isn’t mandatory. What is mandatory is providing for them. If that can reasonably be done with term life insurance, your investments, and a trust, then no whole life is needed.

    Your statement isn’t quite fair about whole life. While 80%+ do get surrendered, it is pretty rare (at least for whole life, less rare for universal) for it to be surrendered with ZERO cash value.

    Personally, if I had a special needs child I still wouldn’t buy whole life insurance. But let me paint a picture of someone who might.

    Let’s say you’re 55 years old with a $500K portfolio. You have a special needs kid, let’s say he’s 15, you’d like to provide for. You could die tomorrow or you could die in 30 years. Either way, you want to be 100% sure he has a million dollars to live on for the rest of his life. At this point, buying a 30 year term policy would be quite expensive. Not quite as expensive as buying a whole life policy, but the whole life policy death benefit would be climbing over those 30 years, the cash value could be borrowed against, and it would still pay out even if you died at 95 instead of 85. So you go for the whole life policy.

    Now you work another 5 or 10 years and retire with a $1.5M portfolio. You can now plan to spend it all on yourself, knowing your son will be taken care of by the whole life policy.

    The example referred to in the post you cited is someone that is 65 with a $100K portfolio. He’s basically going to live on SS. So if he wants to leave something for a kid, he’s going to need a whole life policy, although even then perhaps the value of the house or something could go toward the kid. But he’s still got the issue of how to support the kid between his retirement and his death.

    Hope that helps.

    Now, if it were me that had a special needs kid, I’d simply ensure a significant portion of my assets were left to fund a trust that would support him and I’d spend less, adjusting as I went along to make sure at least a million bucks were left to him.

    It’s a reasonable use, not a mandatory one.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #171486 Reply
     Bob Jones 
    Participant
    Status: Physician
    Posts: 3
    Joined: 12/03/2018

    Whole life/universal life is often recommended to families with a special needs kid as a savings vehicle and tax shelter.  The idea is that parents need to prioritize building up assets that can used to care for a dependent child after the parents’ death, over other investment goals (such as retirement for parents, building a business etc). The pitch from the whole life insurance companies is that the policy provides a known benefit and is passed on income- and estate-tax free. For some lower-income families or families that have a hard time saving and investing on their own, this may be a good way to go.  However, as has been stated here many times, the combination of insurance + investments isn’t generally a great product. And unless your estate will trigger the estate tax ($11 million in 2018) this doesn’t need to drive your planning.

    You would probably be better off investing the money in low-cost funds and establishing an ABLE account and a special needs trust. You will need to structure these so that you don’t jeopardize your kid’s eligibility for programs such as Medicaid.  There are fee-only planners who specialize in special needs:

    https://specialneedsanswers.com/USA-special-needs-planners

    You might want to look at term insurance on the care-giving parent, if one of you has left work to take care of your kid full-time.  This usually isn’t recommended for a non-earning spouse but can be important if one of you does a lot of work that would need to be replaced if case of your early death.

    If you haven’t read it already, I recommend The Special Needs Planning Guide (Nadworny and Haddad).  In fact, if you want to PM me your address I can send you my copy.

    Click to expand…

    Thanks for the input, it’s much appreciated. I thought if you were under $11M for an inheritance, there wouldn’t be any significant tax issues, you seem to be under the same impression. Right now, my current plan:

    1) $5M term insurance through 80 (let it lapse earlier when if I stop working?) – already in force

    2) 5 digit monthly disability insurance – already in force

    3) ABLE plan – fully funded for $15k this year, will put in $15k each year up to $330k. (I believe over $330k is when it starts to count against SSI benefits).

    4) 401k fully funded for me and spouse this year and every year, max out “catch up” contributions at 50.

    5) Using 60%-65% of my net paychecks to fund a brokerage account with a 20 year horizon with (currently) 80% stocks (30% s&p 500, 20% lg cap, 15% mid cap, 10% small cap, 20% international FTSE-esque indicies, 5% int’l emerging mkts) 20% bonds – all vanguard index funds, one ETF.

    5) Special needs estate lawyer for special needs trust – getting appointments this week.

    Thanks for the book rec and your offer to give me yours. Again, much appreciated. I feel bad taking yours, I ordered it on Amazon tonight. If you have any other thoughts, I’d love to hear them.

    Given the stakes of playing this wrong, it’s actually been a bit of a stress. I typically start worrying about him after I put him to bed, stare at financial options forever, worry about his life when I am gone, then fall asleep between 0300 and 0500. At this point, if I fall asleep before the sun comes up, I consider that a win.

    Again, I appreciate your time with your advice.

     

    #171535 Reply
     Bob Jones 
    Participant
    Status: Physician
    Posts: 3
    Joined: 12/03/2018

    I spoke with a financial planner and they were pushing whole life pretty hard. …. 80-90% probability of having zero value (80-90% of all whole life policies are surrendered) seemed like a bad deal.

     

     

     

    Click to expand…

    No you weren’t. You were speaking with an insurance salesman.

    At any rate, some people may have a need for whole life insurance because they have special needs children. But even then, it isn’t mandatory. What is mandatory is providing for them. If that can reasonably be done with term life insurance, your investments, and a trust, then no whole life is needed.

    Your statement isn’t quite fair about whole life. While 80%+ do get surrendered, it is pretty rare (at least for whole life, less rare for universal) for it to be surrendered with ZERO cash value.

    Personally, if I had a special needs child I still wouldn’t buy whole life insurance. But let me paint a picture of someone who might.

    Let’s say you’re 55 years old with a $500K portfolio. You have a special needs kid, let’s say he’s 15, you’d like to provide for. You could die tomorrow or you could die in 30 years. Either way, you want to be 100% sure he has a million dollars to live on for the rest of his life. At this point, buying a 30 year term policy would be quite expensive. Not quite as expensive as buying a whole life policy, but the whole life policy death benefit would be climbing over those 30 years, the cash value could be borrowed against, and it would still pay out even if you died at 95 instead of 85. So you go for the whole life policy.

    Now you work another 5 or 10 years and retire with a $1.5M portfolio. You can now plan to spend it all on yourself, knowing your son will be taken care of by the whole life policy.

    The example referred to in the post you cited is someone that is 65 with a $100K portfolio. He’s basically going to live on SS. So if he wants to leave something for a kid, he’s going to need a whole life policy, although even then perhaps the value of the house or something could go toward the kid. But he’s still got the issue of how to support the kid between his retirement and his death.

    Hope that helps.

    Now, if it were me that had a special needs kid, I’d simply ensure a significant portion of my assets were left to fund a trust that would support him and I’d spend less, adjusting as I went along to make sure at least a million bucks were left to him.

    It’s a reasonable use, not a mandatory one.

    Click to expand…

    Thanks for the example, that’s what I was hoping to see: when would this be a good idea.

     

    I responded to someone else who was kind enough to also give some advice, that I was looking to move significant assets into a trust. Since I’m fortunate enough to be able to generate a large personal portfolio, that seems to be the better play than the whole life “it’s insurance AND savings” thing. Reminded me too much of SNL: “It’s a floor wax AND a dessert topping”.

    #171537 Reply
     Crockett’sRiver 
    Participant
    Status: Physician
    Posts: 129
    Joined: 05/24/2018

    I understand your concern for your kid.  Of course you worry about his life after you are gone – not just financial, but all of it.  This is where your village of friends and family kicks in to reassure you that he will be loved and cared for forever.

    The book is very thorough, although it kind of waffles about whole life insurance, too.  Probably for the reason that WCI outlined above: for lower-income people accumulating a significant estate is too steep a hill to climb.

    According to this website (http://www.ablenrc.org/about/what-are-able-accounts):

    The total limit over time that could be made to an ABLE account will be subject to the individual state and their limit for education-related 529 savings accounts. Many states have set this limit at more than $300,000 per plan. However, for individuals with disabilities who are recipients of SSI, the ABLE Act sets some further limitations. The first $100,000 in ABLE accounts would be exempted from the SSI $2,000 individual resource limit. If and when an ABLE account exceeds $100,000, the beneficiary’s SSI cash benefit would be suspended until such time as the account falls back below $100,000.  It is important to note that while the beneficiary’s eligibility for the SSI cash benefit is suspended, this has no effect on their ability to receive or be eligible to receive medical assistance through Medicaid.

    Additionally, upon the death of the beneficiary the state in which the beneficiary lived may file a claim to all or a portion of the funds in the account equal to the amount in which the state spent on the beneficiary through their state Medicaid program. 

    So the lifetime max is $300k, the first $100k in an ABLE account does not affect SSI eligibility, and an ABLE account will not affect Medicaid eligibility no matter how much is in it.  Since the ABLE account protects a relatively small portion of your assets, the special needs trust is set up to protect the rest.

    Another good resource about ABLE accounts, by people who invest in a way similar to those on this forum:  https://www.bogleheads.org/wiki/529-ABLE_plan.  If you aren’t familiar with this site it’s a fantastic resource.  I’m sure you could post your concerns/questions there and very quickly get a ton of accurate replies – serious personal finance geeks hang out there 🙂

    Sounds to me like you are doing a tremendous job of ensuring that he will be financially secure.   I hope the lawyer can reassure you that the transfer of assets will go as you want it to.  Then you can stop staying up at night worrying about his finances, and just go back to worrying about everything else :). Best of luck.

     

    Career and finance for PCPs at ADoctorsWorth.com

    #171543 Reply
    Liked by Hank
     Tim 
    Participant
    Status: Accountant
    Posts: 600
    Joined: 09/18/2018

    @BobJones
    Several years ago, I ran across something I’d like to share with you.
    My intent is to encourage a change when you tuck your son into bed. Rather than worrying about finances, take satisfaction and joy in another successful day.
    Yes it’s an effort others can’t share, your son is glad you are there to share the journey. I admire your worry, but it’s best celebrate the end of a good day. Jack O’Brian appreciates a good day as well.

    O’Brien Gains Perspective Beyond The Football Field – ESPN Video
    http://www.espn.com/video/clip?id=11735918

    Peace be with you.

    #171547 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 3717
    Joined: 05/13/2011

    Whole life/universal life is often recommended to families with a special needs kid as a savings vehicle and tax shelter.  The idea is that parents need to prioritize building up assets that can used to care for a dependent child after the parents’ death, over other investment goals (such as retirement for parents, building a business etc). The pitch from the whole life insurance companies is that the policy provides a known benefit and is passed on income- and estate-tax free. For some lower-income families or families that have a hard time saving and investing on their own, this may be a good way to go.  However, as has been stated here many times, the combination of insurance + investments isn’t generally a great product. And unless your estate will trigger the estate tax ($11 million in 2018) this doesn’t need to drive your planning.

    You would probably be better off investing the money in low-cost funds and establishing an ABLE account and a special needs trust. You will need to structure these so that you don’t jeopardize your kid’s eligibility for programs such as Medicaid.  There are fee-only planners who specialize in special needs:

    https://specialneedsanswers.com/USA-special-needs-planners

    You might want to look at term insurance on the care-giving parent, if one of you has left work to take care of your kid full-time.  This usually isn’t recommended for a non-earning spouse but can be important if one of you does a lot of work that would need to be replaced if case of your early death.

    If you haven’t read it already, I recommend The Special Needs Planning Guide (Nadworny and Haddad).  In fact, if you want to PM me your address I can send you my copy.

    Click to expand…

    Thanks for the input, it’s much appreciated. I thought if you were under $11M for an inheritance, there wouldn’t be any significant tax issues, you seem to be under the same impression. Right now, my current plan:

    1) $5M term insurance through 80 (let it lapse earlier when if I stop working?) – already in force

     

     

    Click to expand…

    $11.2M is for federal estate taxes. Be sure to check your state laws.

    Term to 80 is not a cheap policy and starts making whole life look better. Doesn’t mean that’s the route you should go, but worth at least getting a quote.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #171586 Reply
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 1664
    Joined: 09/16/2016

    Given the stakes of playing this wrong, it’s actually been a bit of a stress. I typically start worrying about him after I put him to bed, stare at financial options forever, worry about his life when I am gone, then fall asleep between 0300 and 0500. At this point, if I fall asleep before the sun comes up, I consider that a win.

    Click to expand…

    If you absolutely positively have to have money set aside for your child at your death, and this is something you constantly worry about (you’re literally losing sleep), it might not be the worst idea to buy a policy.

    I’ve probably mentioned it before on the forum, but the only really compelling pitch I’ve heard for whole life for a typical consumer is that, all things considered, it’s “safe” money.  If you hold it to term it will perform just OK but if you stay on top of it, you have a reasonable level of confidence that it will perform and that it will ultimately pay out.

    You’re losing sleep now, imagine how you’ll feel when the next lehman goes bust and we’re hit with another 2008 recession.  All of a sudden your 401k becomes the proverbial 201k, and all the money you had set aside and invested for your son and your family is slashed in half.  Sure, the smart investor thinks “great, stocks are on sale” but you, like most people, are going to be in a panic wondering how low it’s going to go, if you should sell now and cut your losses, if you need to downsize your home (at the bottom of the market), if you’ll need to rethink your retirement altogether, if you should buy gold, etc.

    There are no guarantees, but a whole life policy would be a relatively stable “investment” and could give you some peace of mind.

    Personally I wouldn’t make the policy 100% of your son’s money, but a policy representing some fraction of his money might help you sleep at night. I would shop policies very hard, obtain many quotes from multiple agents, and look for companies with high 90/100 comdex scores.

    LEVEL 1 WCI FORUM MEMBER.

    #171619 Reply

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