Financial Planning for Baby
By Lyn Dippel
Nothing gets people thinking about financial planning more than
having a new baby. For many couples, this often is the first time
they come together to plan for the future.
But with all the exciting preparations before the baby is born
(getting the room ready, picking a name, reading books, registering,
finding a pediatrician), who wants to think about finances?
After the baby is born, life is a whirlwind and every cell in your
body is focused on your baby. Understandably, no one wants to spend
one minute away from this amazing and miraculous (not to mention
overwhelming) time to think about finances. However, if you think of
it from the following prospective you may see it differently.
Picture what would happen if something unexpected were to happen to
you. You would want to be in a position to control the unforeseen as
much as possible. In that regard, there are four things that for the
sake of your baby you can’t ignore.
Life Insurance. No one likes to think about this, but you
need to plan for your child if something happens to you. Term life
insurance, which insures you for a fixed amount for a given premium
is generally the best option for new parents. It is relatively
inexpensive and you can change the coverage as your family's needs
change. Every family situation is different and factors such as
income, lifestyle, family history, etc. will determine exactly how
much life insurance you need.
As a general reference, many people arrive at a minimum of $500,000
per child for each income-generating parent (so for a parent with
two children, he/she would need $1 million of coverage). For a
stay-at-home parent, he/she typically needs at least $250,000 per
child to replace the cost the services he/she provided the family
such as childcare. Usually, insurance on your child is unnecessary
since it is meant to replace income or services. Again, these
examples are not specific and some families want (and can afford) an
extra level of comfort.
Disability insurance. Along the same lines as the life
insurance, it's very important that the income earner(s) have
disability insurance to provide for your family if they are disabled
and can't work. Although disability insurance is more expensive than
life insurance, people between the ages of 35 and 65 are more likely
to become disabled than to die. Check to see whether you have
disability insurance through your employer and make sure you know
what the policy covers. Typically you want a policy to cover at
least 60% of your income. You will pay income tax on any benefits
you receive through coverage paid for by your employer. Benefits
from an individual policy (where you pay the premium) are not
considered income for tax purposes. This makes a difference when
considering how much coverage you need. Disability policies are
expensive and it is important to read the fine print. Unlike term
life insurance, there are many variables among disability policies.
For example, in addition to the benefit amount, make sure you know
how they define disability, how long it will pay and if there is an
inflation adjustment built in.
Estate Planning. Whether you are well off or not, you need to
be sure your child will be raised and provided for in the way you
intend if something happens to you. One way to insure this is to
have a will that names a guardian for your child and a trustee to
take care of his or her finances (it doesn't have to be the same
person, and often shouldn't be). Another valuable document to have
in place is a durable power of attorney in which you give someone
legal authority to handle your affairs if you become mentally or
physically unable to do so.
Now is also the time to update the beneficiaries of retirement
accounts like IRAs and 401(k)s to reflect your current intentions.
Even if you won’t be naming your child as the primary beneficiary,
naming a child as a contingent beneficiary could have great tax
advantages later on. *
College Planning. For sure this is a last priority over the
other items, but it is important to look at a savings plan and see
how it fits in with your retirement savings plan. College is
expensive and the longer you wait to plan, the fewer options you
will have.
As overwhelming as it is to prepare and care for a new baby, knowing
you have a guardian secured and have protected your baby financially
will give you great peace of mind.
* Please see a tax advisor for specific details
In addition to being the mother of two, Lyn Dippel, JD is a
financial planner and principal with Symphony Financial. She offers
securities and investment advisory services through Cambridge
Investment Research Inc., a Broker/Dealer, Member NASD/SIPC and a
Federally registered Investment Advisor. For information or to
receive a "Test your Financial Fitness" checklist, email
ldippel@symphony.net or
visit www.symphonyfinancial.com |
