The birth of a child brings drastic changes to a family’s financial situation. Budget’s change, routines change, jobs may change – there is a lot going on. This article will review key financial planning considerations after the birth of a child.
Review Life Insurance
Life insurance is a tool to protect a family against the financial impact that the death of a member of that family could have on the rest of the household. The addition of a child brings an increased importance to adequate life insurance to protect the family.
Typically, term life insurance will be the most cost-effective option. You may have group life insurance offered through your employer that can be considered but you will want to check portability and cost of continuing the policy should you leave employment.
When deciding how much insurance coverage to get, it is prudent to consider the following:
- Liabilities – Are there any debts like a mortgage that you would want to eliminate upon your passing?
- Income – How much does your income contribute towards the household budget? How many years worth of income would you want to replace?
- Family Expenses – Do you want to pay for college or other expenses for your children?
- Extra/Other Expenses – Do you want to cover the cost of your funeral? Are there other expenses you would want to pay for?
Review Health Insurance
After the birth of your child, your baby is covered for 30 days under your existing health insurance. During this period, it is prudent to examine the health insurance options that are available to you and update your health insurance coverage.
The birth of your child is considered a life event that will allow you to enroll in a new insurance if your existing insurance is not ideal for your new situation. Considerations include whether one of the spouses will stop working and lose access to their employer health insurance options, whether your pediatrician will be considered in-network on the selected option, and if there is a desire to use vehicles like an HSA or FSA in which case certain insurance types would need to be selected.
Review Disability Insurance
During the course of your career, you are three and a half times more likely to be injured and need disability coverage than you are to die and need life insurance. If you do not currently have disability coverage or have less disability coverage than is prudent or would be desired, this would be an ideal time to evaluate and update your coverage.
While every individuals family circumstances are different and should be considered, a general rule of thumb is that your disability benefit should be about 60% of your gross pay. When paid using after tax dollars, the benefit you receive would be tax free.
Other items to consider when evaluating your disability policy are the elimination and benefit periods, whether the policy is own-occupation or any-occupation, and if the policy is non-cancelable.
Update your Household Budget
The addition of another person to your household will prompt some major changes to your household budget. While some expenses may go down (you may not be going out to eat as often as you did pre-child), you will experience many new and rising costs.
Some of the costlier one-time expenses you will encounter include:
- Medical bills associated with the birth of the child
- Car Set
- Nursery Furniture
Once the baby arrives, you will also need to consider some of the ongoing expenses you will encounter:
- Day care or nanny (or the impact that one spouse staying home will have on income if you choose to go that route)
- Food and formula
Adjust your Beneficiaries
Beneficiary designations determine what happens to the assets within an account upon your passing. These designations will be most common on retirement accounts such as 401(k)’s and IRA’s but can be added to a number of account types.
For a married couple, we commonly see spouses listed as a primary beneficiary and then children added as a contingent beneficiary. A contingent beneficiary becomes relevant if the primary beneficiary has also passed away.
This is important following the SECURE Act of 2019 as it impacts the timeframe the assets must be withdrawn from the inherited IRA. If left directly to the child, they are able to defer the 10 year rule until they reach the age of majority which is typically age 18 to 21 depending on the state where the minor resides. If left to the estate instead, which is what happens if no contingent is listed in this scenario, then the assets would be required to be distributed within five years following the year of passing.
Update or Write your Will
The birth of a child is often the time that many married couples decide to finally take the time to put an estate plan in place. For those that already have an estate plan, many updates may still be necessary after the birth of your child.
For assets that don’t pass via beneficiary designation, writing your child into the will ensures that the assets are passed to them. Additionally, you can name a guardian for your child to oversee assets and help raise your child should something happen to both you and your spouse.
Begin Savings for Education
The cost of education in America is expensive and continues rising each year. These costs become even higher if a private university and/or grad school become part of the plan.
Starting to save for this cost early can provide a compounding benefit on getting in front of these costs. The mot tax-efficient vehicle to save for college is a 529 savings plan. After tax funds are added to the 529 plan and allow for the funds to grow tax-deferred. As long as the funds are used for qualifying educational expenses, the distribution of assets is tax free.
Even if a small amount, starting the momentum of saving for college early can have a major impact down the road. We are fans of building this savings into your budget and automating it like you would a bill with funds being pulled into the 529 and invested on a monthly basis. As you get raises, you can increase the amount you are adding over time.
Disclosure: Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
You should discuss any tax or legal matters with the appropriate professional.
These policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company.
Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors.