Having a baby can change your life in many ways. But in the midst of it all, don’t forget these three important things you should be doing as a new parent.
#1: Get Life Insurance
If you don’t already have life insurance to cover your spouse, getting life insurance is now very important. Life insurance is protection against the risk that you die quicker than you should. If something should happen to you, your spouse and child would receive money that would ideally replace the income and services you brought to the house.
With life insurance, your family will not be in financial danger because of your lost income in the family. While you’re alive, life insurance gives you the confidence and peace of mind in your daily life to know that your loved one’s financial wellbeing would not change with you being gone. By failing to get life insurance, you put your spouse and child at risk.
Usually “term” life insurance is the best option for most young people, as it is one of the cheapest forms of life insurance. Your insurance agent may try to upsell you on other forms of life insurance, but if you’re below 40, chances are that ‘term insurance’ is your best choice of insurance.
As for the amount of coverage you need, it will depend on the level of income you need to replace. A good rule of thumb: if you make $40,000 a year, your family will need that amount divided by 4% or 0.04 to subsist. The coverage you would need to replace $40,000 is $1M. This amount will allow your family to safely use the money to create a perpetual income stream of $40,000 through investments. This isn’t an “exact” way to calculate a need analysis but you will be relatively close to the amount of coverage that you do need. This video below will get deeper into the calculation of life insurance need analysis.
The time that you’ll need life insurance is dependent on how long the need for risk protection remains. You don’t necessarily need life insurance forever. If you have enough money in passive investments to cover the needs of your family even if you weren’t working, then you don’t necessarily need life insurance. If your child reaches 21 years of age and is working, then you won’t need as much life insurance because there is no need to cover anything.
Pick out your life insurance agent carefully and make sure you can trust them. Or have your financial planner refer you to an ethical one from within their professional network.
#2: Set Up a Will
Setting up a will is important because it keeps you from dying ‘intestate’. This means dying without a will, allowing the laws of the state you live in, guide the process for how your assets will be distributed upon your death. Not having a will also makes your child vulnerable because they can potentially end up in custody with undesirable family members as a result of legal rulings within your state.
By creating a will, your intentions will be set on where custody of the child will go and allow you to control the distribution of assets in a way that’s desirable for you.
There are some decent will generators online that will completely work but if your situation is complex, then you will want to have a will created by an estate planning attorney who can make sure that the will is done properly. Your financial planner should also be able to refer you to an estate planning attorney from within their network.
#3: Set Up a 529 Plan
The best time to start funding your child’s higher education is not 1, 2 or 5 years before they are about to head off to college. It is as soon as possible because you will want to take advantage of compound interest, the benefits of which increase with time. If you’re interested in funding the best possible education for your child, you will want to get started on funding their college education as soon as they are born. This can be achieved with a 529 Plan, which offers extra tax benefits.
A 529 Plan allows you to contribute money into an investment account that will grow tax-free and can be used directly towards higher education expenses tax-free. This makes it much easier to fund an education that may not have been possible otherwise. If your child decides not to pursue higher education, the 529 plan funds can be transferred to another person within the family for their education without consequence.
When designing your 529 plan, you will want to pick higher growth investment allocations with a time horizon of 15-18 years away. But as the child gets older and closer to college, you will want to shift investment allocations away from riskier investments to safer ones. This process can be achieved with Target Date Funds, which are usually available and shift the allocation of funds for you over time. Your advisor should also be able to tailor the 529 Plan portfolio according to your family’s situation.
If you can get these three things done, you will be more prepared than most. Your risk will be lower and you will secure your family’s ability to navigate through life without a problem.