life insurance security 

Learn how life insurance structured under TAMRA, TEFRA, and DEFRA provided long-term security for a family with a child who has special needs. (How a Life Insurance Policy Helped Fund a Special Needs Trust — While Staying TAMRA, TEFRA, and DEFRA Compliant)

Planning for the Unpredictable: Providing for a Special Needs Child

Planning for a child with special needs isn’t just about today—it’s about ensuring care, support, and financial security for a lifetime. According to the U.S. Census Bureau, nearly 1 in 12 children in the U.S. has a disability. These families face long-term financial concerns—from therapy to education to lifetime caregiving.

My client Marissa came to The Policy Shop with a single, heartfelt question: “What happens to my son when I’m gone?” We built a whole life insurance policy with a built-in special needs trust, structured carefully to comply with TAMRA, TEFRA, and DEFRA—laws that help maintain the tax-advantaged status of permanent life insurance policies.

Why Life Insurance is Crucial for Special Needs Planning

A Guaranteed Payout for a Lifetime of Support

Whole life insurance offers a guaranteed death benefit, which can be earmarked for your child’s long-term care—even after you’re gone.

Protection from Government Benefit Disruption

When life insurance is paid into a properly structured special needs trust (SNT), it won’t disqualify your child from Medicaid or Supplemental Security Income (SSI) benefits.

Tax-Free Transfer of Wealth

As long as the policy avoids MEC classification and follows tax law (TAMRA, TEFRA, DEFRA), the payout is income-tax-free and protected.

What Are TAMRA, TEFRA, and DEFRA—and Why They Matter

TEFRA and DEFRA: Ensuring It’s a Real Insurance Contract

These laws help define how much premium can be paid relative to the death benefit. If a policy is overfunded (e.g., paid too aggressively), it may lose its favorable tax treatment.

• TEFRA introduced rules about testing whether policies are actually insurance.
• DEFRA added the Guideline Premium Test and Cash Value Accumulation Test, which we used to make sure Marissa’s policy stayed compliant.

TAMRA: Avoiding MEC Status

To prevent the policy from becoming a Modified Endowment Contract, we followed the 7-pay rule, spreading premium payments evenly over time. This way, future policy loans or withdrawals remain tax-free.

Learn more in our TAMRA, TEFRA, and DEFRA Life Insurance Guide.

The Policy: How We Designed Marissa’s Life Insurance for Special Needs Planning

The Policy Type

We chose a LifeENSURE Whole Life Insurance Policy, customized with a special needs trust named as the beneficiary.

The Premium Strategy

Marissa funded the policy over 10 years, well under the 7-pay test thresholds. She paid $15,000 annually, ensuring the policy remained compliant with TAMRA rules.

The Outcome

The policy projects a $500,000 death benefit, paid directly into the trust. That means ongoing care, housing, and medical support for her son, without compromising his Medicaid eligibility.

Key Benefits of Using Life Insurance in Special Needs Planning

• ✅ Guaranteed death benefit for lifelong support
• ✅ Tax-free payout into a special needs trust
• ✅ Avoids disqualification from government benefits
• ✅ Cash value growth can be used during the parent’s lifetime
• ✅ Customizable ownership and beneficiary structure

FAQs

Q: Can I name my special needs child as the policy beneficiary?

A: No. You should name a special needs trust to avoid affecting their eligibility for government assistance.

Q: Will the policy’s value impact FAFSA or benefits?

A: When structured through a trust, it typically doesn’t count against need-based aid or public support.

Q: What happens if the policy becomes a MEC?

A: Distributions could be taxed. That’s why following TAMRA’s 7-pay rule is essential.

Q: Can I access the policy’s cash value while I’m alive?

A: Yes. You can use policy loans to cover unexpected expenses—without affecting the trust or the child’s benefits.

Final Thoughts: Smart Planning That Lasts Beyond a Lifetime

Marissa’s story isn’t just about a policy—it’s about peace of mind. Life insurance can be more than a safety net. When structured properly under TAMRA, TEFRA, and DEFRA, it becomes a lasting legacy that protects your loved ones without compromise.

If you’re planning for a child or loved one with special needs, schedule a free consultation. Let us help you build a smart, compliant, and compassionate strategy.