Business Owner with a Special-Needs Child
Arjun, 42, owns a residential remodeling company valued at USD 850,000. His wife, Leela, 40, works part-time earning USD 35,000. They have a 7-year-old son with autism and a 4-year-old daughter. Mortgage balance USD 360,000; other debts USD 40,000; savings USD 120,000. Arjun's income is USD 210,000, of which USD 90,000 is owner distributions. Group long-term disability covers 60% of base salary of USD 120,000 for two years, then ends. He has USD 500,000 of 10-year term life insurance through the business and USD 250,000 on Leela. There is no long-term care insurance. They want to ensure their son's care continues for life and keep the business in the family. Leela's sister would raise the children if both parents died. They ask whether to buy more term life or permanent insurance and how much.
1. Perform a needs analysis and identify the largest insurance gaps.
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The largest gap is disability, not life insurance. During Arjun's working years, a disability is more likely than death, and the group policy pays 60% of USD 120,000, or USD 72,000, for only two years. His actual income is USD 210,000, so the family would face a large and permanent income gap while still supporting two children. An individual own-occupation disability policy with a benefit period to age 65, residual disability, and a future increase option should be the first priority.
The life insurance need is also substantial. Immediate obligations are USD 400,000 of mortgage and debts. Education for two children might require USD 250,000. A lifetime care fund for the son could reasonably require USD 750,000 to USD 1 million in today's dollars, depending on benefits and family support. Income replacement for Leela and the children could add another USD 1 million to USD 1.5 million. Against that, they have USD 120,000 of savings and USD 500,000 of term life. A rough gap is USD 2 million or more. Leela's USD 250,000 policy is low relative to the cost of replacing her caregiving and part-time income.
The business interest is separate: a buy-sell agreement funded with disability buyout and life insurance protects Leela and the family if Arjun dies or cannot work.
2. Prioritize the insurance recommendations and explain how you would choose between term and permanent coverage.
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Sequence matters. First, replace the inadequate group disability coverage with an individual policy. Second, increase term life insurance on Arjun to cover the income-replacement and debt needs, and increase Leela's coverage to fund childcare and household services. Third, establish a lifetime care plan for the son, which may include a special-needs trust funded by a permanent policy, but only after the disability and term needs are covered. Fourth, consider long-term care insurance for Arjun and Leela, because caregiving needs may compete with the son's trust.
Term insurance is the efficient way to cover the next 20 to 25 years, when the children are dependent and the mortgage is outstanding. Permanent insurance can be appropriate for the special-needs trust because it guarantees a death benefit regardless of when death occurs and can provide lifetime funding. But permanent coverage is expensive, and buying too much of it may crowd out disability coverage and retirement savings. A practical structure is a large term base, plus a smaller permanent policy owned by or payable to the trust. The amount should be based on the trust's projected annual care gap and the number of years the trust must fund, not on a generic multiple of income.
3. How should policy ownership and beneficiary designations be structured for the special-needs child?
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The son should not receive life insurance proceeds outright. An outright inheritance could disqualify him from needs-based public benefits and could be poorly managed after the parents die. The beneficiary should be a properly drafted special-needs trust, with Leela's sister as guardian of the children and a separate trustee, ideally a professional or trusted relative, managing the trust. The trust document should give the trustee discretion to supplement, not replace, public benefits.
Ownership depends on the goal. If the parents want control and the ability to change beneficiaries, Arjun or Leela can own the policy and name the trust as beneficiary. If estate-tax inclusion or creditor protection is a concern, an irrevocable life insurance trust can own the policy, but that gives up control. Because the estate is below the current federal exemption but state law may differ, the recommendation should be coordinated with an estate attorney. The key point is that beneficiary designations, not the will, control the proceeds. All policies, retirement accounts, and accounts intended for the son should be reviewed so that nothing passes to him outright by default.