August 17, 2017

Starting A Family? Consider Life Insurance

Portrait of a happy mature man and woman carrying kids on backTo most new parents, starting a new family with a new baby means figuring out how to live on just three or four hours of sleep and finding what detergent will best remove your babies spit-up stains.

Numerous financial issues will crop up once you have a child but will rarely get the time of day. Many new parents put their family’s long term financial security at risk by avoiding financial issues altogether or by making rash decisions.

Here are some of the biggest mistakes that new parents make when it comes to their finances:

Skimping on life insurance

Lynn Ballou, a financial planner in Lafayette, Calif. states that having enough life insurance is essential once you become a parent. “you have to make sure your dependents will be provided for if one or both parents die”

While you may have some life insurance coverage through your employer, “that’s usually not enough,” Ballou says. “Anyone with a kid these days should at least have a $500,000 policy as a bare-bones minimum,” she says. What’s more, if you are healthy, group policies are rarely any cheaper for you than an individual policy, and they aren’t portable. If you get laid off, you lose your life insurance. “Imagine if you got laid off when you were having medical problems. Getting a new policy would be extremely expensive,” Ballou says. “It’s much smarter to simply get an individual policy.”

How much life insurance do you need? As a rule of thumb, people generally need five times their earnings, plus the total amount of their household debt and enough to cover college tuition for their children, says John Ryan, owner of Ryan Insurance Strategy Consultants in Greenwood Village, Colo.

Don’t forget to run the same calculation for a stay-at-home spouse, whose premature death may mean having to hire full-time child care, Ballou adds.

Term insurance is recommended for most new parents. “It meets most people’s needs,” and it’s the simplest and cheapest kind, says Peg Downey, a financial planner in Silver Spring, Md. A 30-year-old healthy man recently could have gotten a $500,000 term policy from First Penn Pacific Co. for $475 a year, says Ryan, the Colorado insurance consultant. Choose a term that lasts until your dependents are through college and no longer in need of your financial support, Ryan says. And then, be sure your policy has the option to convert to a permanent whole life or variable life policy. That way, if you decide later that you want lifelong coverage, it will be cheaper to convert than to buy a new policy.

You can get life insurance quotes on Barraganinsurance.com, as well as read more about insurance issues and find out if you have enough coverage overall.

Shrugging off disability insurance

Statistically, it is more likely that you will get injured than die while you are in the work force, so Disability insurance is arguably more important than Life Insurance. , because it’s statistically more likely that you will get injured than die while you’re in the workforce. Most employer-sponsored plans will pay you only 60% of your salary if you become disabled. As a rule of thumb, if you’re earning under $100,000, that’s probably enough coverage, Ryan says. “People who earn more usually have the need for a supplemental plan.”

To figure out how much coverage you should have, take a realistic look at your family’s spending.  Get a policy that would enable you to cover expenses and maintain your standard of living if you had to be out of work for a while.

Prices vary dramatically between insurers, but generally, for a 30-year-old male, every $1,000 per month of supplemental coverage would cost about $370 a year, according to Ryan. For a woman the same age, that extra coverage would cost $540 a year.

Buying life insurance for baby

Walk away if an insurer tries to sell you life insurance for your kid.  “You buy life insurance on someone only if their death would create financial hardship,” says Marilyn Capelli, a financial planner in Bloomfield Hills, Mich.

Some salespeople say a lifetime policy on a child is a smart security measure. Those salespeople will tell you insurance would be very costly if your child develops a medical condition later in life.  Their sales pitch will likely include that will also say something to the effect of “at least you will know he will always be insured – so if you buy a policy for less now…” . “But it’s unlikely a healthy child will develop a problem that will last into adulthood,” Capelli says. “And if he did, by then the coverage would probably be small relative to his needs.”

Delaying saving for college

Most parents start worryg aout college tuition when their kids enter high school – by then it is way too late. “The best time to start is when your child is born,” says Dennis Gurtz, a financial planner in Bethesda, Md. There are a couple of attractive tax-free college savings options:

  • 529 college savings plans. You can contribute $25 a month or up to $250,000 each year to these state-sponsored plans. Your money grows tax free as long as it is used for college costs.
  • All states sponsora college savings plan, and each is managed by a brokerage or mutual fund company. The Illinois plan is run by Salomon Smith Barney, and Maryland’s is managed by T. Rowe Price. You can participate in any plan no matter where you live. Your child can attend any school of thier choice .
  • The plans invest your money in a portfolio of stocks and bonds that gets gradually more conservative as your child nears college age.
  • For information on the performance data on 529 plans, see SavingForCollege.com. For a listing of all 529 plans, check out The College Savings Plans Network Web site.

 

Coverdell education savings accounts. Formerly called education IRAs, these let you contribute up to $2,000 a year in a tax-free accounts. The earnings build up tax-free. There are some income limits, however: $220,000 for couples filing jointly, and $110,000 for singles. For more on Coverdell accounts and college planning,

Forgetting what’s most important: retirement savings

Once you’re started saving for your child’s college tuition, it’s easy to shrug off saving for retirement. Big mistake, Ballou says. “Saving for retirement always comes first, college comes second,” Ballou says. “You and your child can figure out other ways of getting through school. It would be worse if your child had to support you during your retirement.”

Max out on your 401(k), 403(b), IRA, or whatever retirement plans are available to you. Stay-at-home parents should sock cash into an IRA. Particularly, look into a Roth IRA. These take after-tax dollars. Earnings inside the account build up tax-free, and, later on, you can withdraw money without incurring taxes. Read more about retirement planning on MSN Money.

Postponing a will

Many parents assume they don’t need a will because they don’t have large estates.  If you have a child, a will is essential to designate guardians. “If you and your spouse die prematurely without a will, a court will appoint guardians for your children,” says Elizabeth Lewin, co-author of “Family Finance.”

Hire an attorney to draft a will (cost: $500 to $1,000) in which you name an executor, who would pay your debts and distribute your assets, and a guardian for your children. “These may be two different people; sister Jane may be a great mom, but she may not be good with money,” Lewin says.

Also, name two backups for both child and money issues, advises Ballou. “What if you want your sister to take care of your kids, but for some reason she’s not able?”

If you have specialized concerns, such as lifelong support for a disabled child, you may want to set up a more complex estate plan that includes a custodial account or a trust.

An alternative is to write your own will using computer software. For more information on these programs, read “12 easy steps to preparing your estate plan” on MSN Money. But, as Ginger Applegarth notes in that article, if your estate is at all complex, you’re probably better off consulting a lawyer.

Overspending on baby costs

The higher your income, the more expensive it is to raise a child. For a child born in 2003 to a family with annual income of more than $65,400 a year, the basic expenses of child-rearing will set you back more than $344,000, according to the U.S. Department of Agriculture. And that’s just until age 18.

While a lot of this spending is necessary, some of it isn’t. Many seasoned parents admit their most irresponsible spending occurred in their children’s earliest years and before they were even born. Who really needs a $500 hand-stitched crib bumper? “New parents think they need everything, want everything to be perfect, and don’t know what things cost,” says Downey, the Maryland planner.

Come up with a spending plan before you start setting up a nursery.  Accept hand-me-downs, and shop at yard sales and consignment and second-hand shops.

Remember that a lot of what you buy will only be used for about a year, sometimes less — especially baby clothes.