Children - The Best, and most expensive, Investment You Will Ever make
Up until this month, our financial planning articles have been focusing on you and, perhaps, your spouse. This month, we are going to complicate your hypothetical life just a little more by giving you a child. At this point, we are going to drop the Debt, Retirement Savings, and Investment categories for the time being and maybe add one or two new considerations. Please don’t take this as a sign that we think the topics are fully covered; consider a brief reprieve from the "savings" preaching.
You just looked at the results of the Early Pregnancy Test (EPT) you got from the supermarket and it says you are pregnant. If you are a male reading this article, make no mistake both of you are pregnant. No doubt, the mother to be will carry the lion’s share of the load, but you will find that your bundle(s) of joy come(s) with more than just a few changes in you life.
Ok, so what’s your next step after the awe, shock, joy and sheer terror have subsided? Of course, you go to the doctor. The potential costs of prenatal care and the eventual delivery don’t bother you because your employer has provided you with insurance. Are you sure about that? In these times of spiraling medical costs, employers are looking for ways to reduce the increase in health insurance. Sometimes that means things like maternity costs are cut, if allowed by law. While you won’t be able to go back and get coverage under the employer’s plan that excludes it, at least you will know what your conversation with the doctor’s business manager will center on.
While knowing what coverage you have for maternity costs is important, knowing when you can add the baby to your coverage can be even more important. Many times, insurance policies will allow you to add the unborn child a month before the baby is born. While this may seem foolish and an added expense you don’t want to pay, consider the cost of a premature or sick baby. While most births are normal and the child is born healthy, consider the case of a full-term baby who had trouble breathing when born. A few days later he crashed and the eventual cost of treatment for the child was $400,000 plus. Luckily, the parents had added the child to their insurance policy the month before the birth. If you take nothing else from this article, remember that lesson and cover the baby as soon as your employer will allow.
Disability and Life Insurance
Just like the title of this article says, kids are expensive - very expensive. Because of that, you may need to cut back on expenses, along with sleep, after the baby comes. Don’t let one of the places you cut be your disability or life insurance. Instead of being a reason for dropping these types of coverage, having children is a reason for increasing coverage as much as you can. Now, instead of providing for your spouse, you will need to have enough to provide for your spouse and one or more children. That will be expensive and if you can swing it, add to your coverage.
Since disability insurance is based on income, you may or may not have the ability to increase your coverage. Life insurance is another matter. Talk to your agent and investigate the possibility of adding term life insurance. Properly designed, term insurance will provide you with coverage for your family until the children grow up without locking you into more expensive life insurance products. When the need to protect your spouse and children is gone, you can drop the insurance and add to your investments.
There is not much to say here, except talk to your lawyer. Your attorney will be able to assist in rewriting your wills to make provisions for your child or children. Be sure to discuss who will take the responsibility for raising the children if something happens to both you and your spouse. The importance of this cannot be overstated. You will want the best for your child and the only way that you will have any control is in your will. Make sure you provide alternatives and also that your prospective guardians agree to be named.
Before you go back to the top of the article, we did say we weren’t going to talk about investments, but we didn’t say that we weren’t going to talk about providing for your child’s education. Given the ever-increasing cost of college tuition, room and board, this is one place you had better start saving as soon as possible. Luckily, you have a few choices and, while none of them are deductible for federal purposes, some may be deductible at the state level.
First, let’s mention the Coverdell Education Savings Account. This is an account that you can open for your child and invest up to $2,000 per beneficiary for each year. While the contribution is not deductible, earnings are tax free if the funds are withdrawn to pay for qualified education expenses. Qualified education expenses are not limited solely to higher education, but may also be used at the elementary and secondary school levels also. The amount you can contribute begins phasing out at $95,000 for single filers and $190,000 for those filing married and joint, but this applies only to individual contributors. Since contributions can be made by anyone on behalf of a beneficiary, you may consider making the contribution through a closely held corporation, trust or other entity or person not subject to the phase-out rules.
If your child doesn’t use the funds in his or her Coverdell account by the age of 30, it must be distributed to the beneficiary within 30 days of the 30th birthday. However, the funds can be rolled over to another eligible family member under certain circumstances. Otherwise, a 10% penalty will apply in addition to any income tax.
Another handy vehicle that is gaining popularity is the "529 Plan." Also called a Qualified Tuition Program, many states or private educational institutions now offer these plans. In essence, these programs allow you to buy tuition credits or contribute cash to investment accounts that will be available to cover the cost of tuition and other qualified educational expenses when the time comes. While contributions are not deductible, the beauty of these plans is that there is no effective limit on the amount you can contribute and some states offer a credit or tax deduction for some or all of your contribution. Additionally, there is no tax on the income of the plan if the distributions are used for qualified expenses.
If you prefer, you can always just start a regular investment account for your child. Be aware, though, that you could pay a high tax cost on the earnings and greatly reduce the amount available for your child’s education.
Children are, without a doubt, the greatest blessing you will ever have. They can also be your greatest frustration in many ways. We can’t help you with most of what your child will do to drive you crazy. You can blame the parent who said, "Wait until you have children," for most of those frustrations. However, we can help you with the financial planning end of things. Give us a call if you are expecting your first child or if you are already a parent. Let’s take a look at your plans and see how you can maximize the financial security of your family.
Have a great March and please remember to keep our troops in your hearts and prayers.