Life insurance and disability

If you're seeking coverage on your own life

A disability is not itself an underwriting classification. Insurers assess the underlying condition, how it's managed, whether it's stable, and your overall health picture — as with any medical history.

Carrier guidelines vary considerably, so a decline from one insurer says little about another. Employer group coverage is also worth checking, since it typically requires little individual underwriting.

The trap when providing for a disabled dependent

This is the important part. Means-tested benefits — Supplemental Security Income and Medicaid among them — have asset limits. A life insurance death benefit paid directly to a disabled person can push them over those limits and disrupt eligibility for benefits they rely on.

Naming them as beneficiary with the best intentions can therefore cost them support worth more than the payout. It's a well-documented problem and it's avoidable.

The structures that exist for it

Special needs trusts — sometimes called supplemental needs trusts — are designed so assets can benefit a disabled person without counting toward means-tested eligibility. A policy is named to the trust rather than to the individual.

There are strict rules about how these are drafted and administered, and getting them wrong defeats the purpose. This is squarely a matter for an attorney who does this work, not a form from an insurer.

What to do in what order

• Speak to an attorney experienced with special needs planning before naming any beneficiary
• Establish the trust properly, if that's the route
• Name the trust as beneficiary rather than the individual
• Coordinate with any other family members leaving assets, so nobody names them directly
• Review it when benefit rules or family circumstances change