Planning For Special Needs: Overcoming The “Atlas Syndrome” With Life Insurance

Nearly one-fifth of all Americans—more than 54 million—have a physical, sensory or intellectual disability, according to the National Organization on Disability.1 Many of them are children. While the definition and severity of the disability may vary, parents and caregivers of children with special needs are invaluable to their daily well being—providing medical, emotional, social, financial or learning assistance. That level of support can make all the difference in the lives of children with special needs. It can also lead to the parents and caregivers feeling like Atlas with the weight of the world on their shoulders.

What happens when a parent or caretaker passes away? How will the child with special needs continue to be supported? Sixty-nine percent of families say they are very concerned about being able to provide lifetime care for their dependents with special needs.1 While most parents and caregivers worry about their children’s lifelong financial security, few are familiar with the types of planning opportunities available to them.

88 percent of parents who have children with special needs have not set up a trust to preserve eligibility for benefits such as Medicaid and Supplemental Income.1

Enabling Hope for the Future
Thirteen years ago, Julie and Samuel Smith were blessed with a beautiful baby girl they named Hope. Julie was a stay-at-home mom while Samuel worked full time to support the family. From the outset, Julie sensed that Hope was different from other children. After countless doctor visits and examinations, Hope was diagnosed with a form of autism spectrum disorder.

Fast forward to today. Hope is now a teenager and struggling with many of the typical issues of adolescence. And while Julie has managed to get some special help for Hope, she knows that Hope will not be able to live independently. Hope will continue to need assistance well into her adult years and especially after Julie and Samuel die. But who will provide the care Hope needs? How will Hope be cared for emotionally, physically, and financially? Will Hope be okay after her parents are gone?

The dilemma for many families and caregivers who have children with special needs is how to provide a decent and meaningful lifestyle for their loved ones while ensuring access to the variety of available benefits. That’s where a special needs trust may help.

A Special Trust for Special Needs
A special needs trust, which is sometimes called a supplemental needs trust, is an irrevocable trust designed to provide for the care and comfort of beneficiaries who are disabled without jeopardizing their access to programs, funds, and/or medical benefits available to them (including government funded programs like Social Security Disability Income, Medicare, Medicaid, etc.).2 A properly drafted special needs trust provides the trustee with the discretion to make distributions for the benefit of the beneficiary who has special needs. All distributions of income or principal must be at the discretion of the trustee. In other words, the distributions should not be mandatory as it may jeopardize the child’s benefits.3

Planning Tip: The trustee of a special needs trust should have a working knowledge of the government benefits available to the child with special needs. It’s important to ensure that the trustee understands which distributions may jeopardize the child’s benefits and ensure that such distributions are not made.

A special needs trust may hold cash as well as title to stocks, bonds, mutual funds, real estate, and personal property. The trust may also own life insurance, which typically covers the lives of the parents or caregivers.4 Why life insurance? Because life insurance purchased inside a special needs trust may play a critical role in making sure funds are available for the child’s care at a most critical time when the parents or caregivers may no longer be alive to provide the required care.

But who should be the insured? Let’s go back to Hope. Once a special needs trust is established and an appropriate trustee is selected,5 Julie and Samuel may gift funds6 to the trust. Those funds may be used by the trustee to purchase life insurance on Julie’s life, Samuel’s life, or both of their lives. Recall that Julie is the primary caregiver and that Samuel is the financial provider.

Consider the following scenarios:

  • If Julie should die before Samuel, who would care for Hope? Samuel? Someone else? Life insurance on Julie’s life may make sense to address this issue.
  • If Samuel dies first, how can Julie continue to support Hope? Will Julie hire someone to help care for Hope while she works? In this case, a life insurance policy on Samuel’s life may help.
  • If two single life insurance policies are out of the question, Julie and Samuel may consider a second-to-die policy that pays out at the second death. This route, however, may not address the issues raised earlier (how to care for Hope when either Julie or Samuel dies). The couple may want to consider two smaller single life policies insuring Samuel and Julie and perhaps a larger second-to-die policy.

The life insurance coverage provides an income tax-free7 death benefit to help support the child with special needs, but the available life insurance cash value may also be utilized on a tax-free basis8 during the insured’s lifetime if necessary to provide the child with additional support.

For parents and caregivers caring for a child with special needs, proper planning with life insurance is only one step in the process of caring for the child. Nonetheless, it is a step that may help lift the proverbial world off the parents’ and caregivers’ shoulders. Life insurance may also provide them with something money cannot buy—the peace of mind of knowing that the child will be cared for long after they are gone.


  1. Statistics, M&L Special Needs Planning (, Accessed July 7, 2021.
  2. There are a variety of special needs trusts (SNTs). For purposes of this publication, we will focus on Third Party SNT–an SNT created by someone other than the disabled beneficiary. Third Party SNTs are often created by the parents or grandparents of a special needs person. The Third Party SNT can be created during the lifetime of the grantor. Please consult with advisors that are well versed in this subject matter before undergoing special needs trust planning.
  3. SNT assets may be used for a number of the child’s needs. For example: a) transportation; b) training, c) rehabilitation or education programs; d) equipment; e) entertainment; f) companion/home health aide expenses; and/or g) items to enhance quality of life/self esteem. Given the requirements of an SNT and complexity of issues, please consult with legal counsel well-versed in SNT planning.
  4. The SNT may purchase life insurance on the life of an individual or individuals over which it has an insurable interest. Please consult with legal counsel for more information on whether the SNT has the insurable insurance interest.
  5. In this context, it is prudent to ensure that the trustee is familiar with the various state and federal programs available to the beneficiary. Additionally, the trustee appointed should not be the insured or the insured’s life insurance producer. A life insurance producer who is paid a commission on the sale of a life insurance policy represents both his or her personal interest and the interests of the trust, creating a conflict of interest.
  6. As of January 1, 2021, the annual gift tax exclusion is $15,000 per donee (indexed for inflation).
  7. For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: The transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2) (i.e., the “transfer-for-value rule”); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).
  8. For federal income tax purposes, tax-free income assumes, among other things: (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); (2) policy remains in force until death (any outstanding policy debt at time of lapse or surrender that exceeds the tax basis will be subject to tax); (3) withdrawals taken during the first 15 policy years do not cause, occur at the time of, or during the two years prior to, any reduction in benefits; and (4) the policy does not become a modified endowment contract. See IRC §§ 72, 7702(f)(7)(B), 7702A. Any policy withdrawals, loans and loan interest will reduce policy values and may reduce benefits.

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Pacific Life Insurance Company is licensed to issue insurance products in all states except New York. Product/material availability and features may vary by state. Insurance products and their guarantees, including optional benefits and any crediting rates, are backed by the financial strength and claims-paying ability of the issuing insurance company. Look to the strength of the life insurance company with regard to such guarantees as these guarantees are not backed by the broker-dealer, insurance agency, or their affiliates from which products are purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company.

Life insurance is subject to underwriting and approval of the application and may incur monthly policy charges.

Broker World and companies referenced in the article are not affiliated with Pacific Life Insurance Company.

Lindsay Cigler J.D., is a consultant for Pacific Life’s Advanced Designs Unit, a highly recognized team of advanced market experts, comprised of five attorneys who specialize in advanced planning concepts that involve the sale of life insurance. She serves as a resource for life insurance producers and financial professionals in answering questions and assisting with the structuring of advanced planning concepts involving life insurance. Cigler also conducts research and creates marketing materials on advanced planning strategies, as well as prepares presentations and speaks on advanced planning topics including estate and business planning.

Cigler joined Pacific Life’s Advanced Designs Unit in 2017. Prior to joining Pacific Life, she was an associate attorney at a law firm in Newport Beach, CA, focusing on advanced estate planning for high net worth individuals. She graduated from Pepperdine University’s Seaver College with an undergraduate degree in Public Relations and a concentration in Psychology. During her undergraduate studies, Cigler spent a summer taking classes in Washington, D.C., and working in Congress. She earned her Juris Doctor degree (J.D.) from Pepperdine University’s School of Law. While at the School of Law, she worked at the Pepperdine Legal Aid Clinic and participated in the London Program, spending a semester studying in London. Cigler is a member of the State Bar of California, United States District Court (Central District of California), American Bar Association, and the Orange County Bar Association.