As a new parent myself, I understand the overwhelming feeling of being thrust into a situation where you are immediately responsible for the well-being of a child. For me, it literally happened overnight! I had always imagined what it would feel like, but the love I felt the first time I held Ella is, and always will be, unmatched.
If love is the first feeling you get, the constant anxiety of “am I doing this right?” is a close second. To remove some of that anxiety I included a few financial items to consider below. The first thing I tell a new parent is to determine whether you have the right amount of life insurance in place. From there, get an account started so you can save for your child. Finally, make sure there is a legal plan in place for your family. The information below isn’t exhaustive, but it is a good way to alleviate some of that “am I doing this right” anxiety.
A general rule of thumb is to consider a life insurance policy with a death benefit amount equal to at least 7 to 10 times the amount of your annual salary. Sounds crazy right? Why would you turn your spouse into a millionaire, that might give them they incentive they need!
Well, in all reality, what we’re trying to do here is replace your income if you aren’t there. Not buy your spouse a mansion, but just the opposite. There will be an emotional loss, we are helping to prevent a compounding financial loss.
Think about it…Say for instance you make $50,000 year and have a $1,000,000 term life policy. $50,000 x 20 = $1,000,000. Therefore, using simple math (not factoring in inflation, expenses, interest, etc.) a one-million dollar death benefit only provides your family an income stream of $50,000 per year for 20 years, and then the money is gone. It doesn’t get your spouse rich, it just keeps life the same.
I know, you have “group/employer” coverage. That’s great, but recognize that it may not be enough. You may want to keep that coverage, but consider securing your own private coverage as well. The easiest, most affordable way to do this is typically with term life insurance coverage.*
With kids comes money. Checks start coming in from family and grandparents (god bless grandparents) for baptisms, birthdays, congratulations, you name it. One place to save your child’s money is in a college funding vehicle, like a 529 plan. Every state has their own 529 Savings Plan. Some states provide tax benefits for using your states plan, but that’s not the case for every state. You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision. Helpful information can be found here: http://www.savingforcollege.com/
529 Plans are fairly simple. They are easy to set-up and very flexible. They must be used for qualifying education expenses (tuition, books, room and board, etc.). The nice part is that anyone can put money in there (grandparent, aunt, uncle, neighbor, stranger, you get the point), you can also change the beneficiary at any time. If little Billy gets a scholarship, then give the money to little Susie Q instead. All the money inside the account grows tax deferred and comes out tax favored if used for qualifying education expenses.**
Because they are so easy to establish and the cost of college is escalating so quickly, this is something any new parent who wants to help their child fund college should consider.
Although it’s never fun to think about it’s important to name legal custody of your children if both parents are to decease. If you don’t name this in a will, or other legal document, the state will decide. As you can imagine, they might have different opinions than you do on this matter.
In addition to that, an attorney may also help remind you of where your assets need to be titled during this process. In many cases, the beneficiary of your life insurance policy might be different than the person assigned to take care of your child if you pass. For example, let’s say you and your spouse tragically pass in a fatal car accident. If you had your spouse as the primary beneficiary and your parents as the contingent beneficiary (which is common), then your parents would receive your death benefit. However, in most cases, one of the siblings is named custodian of the kid(s) and you can immediately see where this does not align.
Although you can find websites online to get these affairs in order, I would recommend seeking legal counsel. To me this is an item that’s too important to not be done exactly as you would like. Family law attorneys are everywhere. Google it, interview a few of them, ask them about their price and go from there.
Compliments of Wes Sharp, Financial Advisor
Financial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.
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* Life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender periods.
*A 529 plan is a tax-advantaged investment program designed to help pay for qualified education expenses. Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover education expenses. Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals.