These policies are typically structured to fund a special needs trust, allowing parents or guardians to leave financial support without jeopardizing eligibility for public assistance. Done correctly, this strategy helps a child or dependent with a disability continue receiving benefits while gaining access to supplemental resources for housing, caregiving, transportation, therapies, and quality-of-life needs.

Many plans use permanent life insurance (e.g., whole life or guaranteed universal life) or a survivorship policy that pays after both parents pass away. With the right legal and financial structure, proceeds are managed in the beneficiary’s best interest—without disrupting means-tested benefits.

At Diversified Insurance Brokers, we specialize in helping families create comprehensive special needs plans, coordinating with both insurance and legal professionals to ensure lasting protection.

👉 Visit our special needs life insurance page here

What Is Special Needs Life Insurance?

“Special needs life insurance” isn’t a separate product label as much as a planning approach. The core idea is to own a life insurance policy—often on a parent’s life—and name a properly drafted third-party special needs trust (SNT) as the beneficiary. At the insured’s death, the policy proceeds flow to the trust. The trustee then uses the funds to enhance the beneficiary’s life without giving assets directly to them, which could otherwise disrupt eligibility for SSI/Medicaid.

Special Needs Trust basics (high-level)

• Third-party SNT: Funded with someone else’s assets (e.g., parents). Common for estate planning; generally preserves benefits if drafted/administered correctly.
• First-party SNT: Funded with the individual’s own assets (e.g., inheritance or lawsuit); subject to payback rules. Less common for insurance-based planning.
• Pooled trusts: Managed by nonprofit organizations; useful when professional administration or smaller funding amounts are involved.

Who Needs It?

• Parents/guardians of a child or adult dependent with disabilities who receive (or may receive) SSI/Medicaid.
• Families wanting to protect eligibility for benefits while ensuring supplemental funds for therapies, respite care, transportation, and community inclusion.
• Caregivers who need a succession plan (Who manages funds when we’re gone?) with trustee oversight and written guidance (Letter of Intent).

How the Insurance + Trust Structure Works

1. Draft the trust: An attorney creates a third-party Special Needs Trust tailored to your state and family needs.
2. Select the policy: Choose coverage type/amount aligned with long-term care goals and budget (see table below).
3. Set beneficiaries correctly: Name the SNT—not the individual—as the life insurance beneficiary.
4. Appoint trustees: Name a primary trustee and successor(s). Consider corporate or pooled trustees if appropriate.
5. Coordinate your estate plan: Wills, powers of attorney, and beneficiary designations should all match the SNT plan.
6. Maintain a Letter of Intent: Non-binding guidance for the trustee (daily routines, providers, preferences, goals).

Policy Types Commonly Used

Best Practices & Common Mistakes

• Do name the SNT as beneficiary. Avoid naming the individual directly; doing so may jeopardize benefits.
• Don’t rely on verbal wishes. Put guidance into a written Letter of Intent and keep it current.
• Avoid benefit-reducing distributions. Certain payments (e.g., some housing/food support) can reduce SSI cash benefit. Your trustee should understand distribution rules.
• Review ownership & premium payers. Align policy ownership (parent, trust, or entity) with tax and administrative goals.
• Coordinate with ABLE accounts. ABLE can complement an SNT for smaller, flexible expenses (subject to annual limits).

How Much Coverage Do We Need?

When determine how much coverage is needed, start with an annual supplemental-needs budget (caregiving, therapies, transportation, recreation, advocacy) and an expected time horizon (the beneficiary’s lifetime). Add reserves for inflation and professional services (trustee fees, care management). We’ll map this into a death-benefit target and compare policy structures that meet the need within your budget.

Application Tips

• Underwriting: Parents are usually the insureds; medical history, age, and coverage amount affect pricing.
• Riders to consider: Waiver of premium, guaranteed insurability (where available), term riders (to blend costs), or chronic/long-term-care riders when appropriate.
• Ownership/beneficiary alignment: Keep the beneficiary designation synced with the SNT, and update after life events.

Example Scenario

Two parents in their early 40s select a $750,000 survivorship GUL and name their third-party SNT as beneficiary. Their Letter of Intent outlines daily routines, therapies, and preferred providers for their adult child. At the second death, proceeds fund the SNT, and the professional trustee pays for transportation, day programs, and respite care—while SSI/Medicaid remain intact under trust distribution rules.

Get Personal Guidance

We work closely with families and their attorneys to design the correct insurance + trust structure, compare carriers, and keep costs manageable—so your plan is coordinated and durable.