Seven Essential Actions To Take When You Have a Child
Having a new child can be extremely exciting, but in the midst of all your excitement you don’t want to overlook these seven essential actions we recommend considering to ensure your family is protected.
To download this printable guide:
Establish Health Insurance
In most cases, you have 30 days from your child’s birth date to add the baby to an existing health insurance policy. In some employer-based plans, you have 60 days. Regardless, do it sooner rather than later, as you don’t want to be caught with a sick baby and no coverage.
Infant I.C.E. Car Seat Sticker
If you are in a car accident with your child, having an INFANT I.C.E. Sticker can save your child’s life. The all-new INFANT I.C.E. Sticker can be applied to your child’s car seat for paramedics and first responders to read.
List your child’s allergies, medications and other vital information that first responders can read if you are unable to tell them. Adults have a form of ID with them always, but children do not. The INFANT I.C.E can save paramedics time, allowing them to call the baby by the correct name and get ahold of the emergency contacts.
You can purchase one on Amazon by clicking here.
Establish Successor Guardianship & Communication Plan
A guardian is a person who has legal responsibility for a child in lieu of the parents. Guardians are appointed for children when the parents are deceased or are unable to care for them. You will want to appoint your guardian legally in your Last Will.
Once you select someone to name as a guardian, it is important to discuss it with him or her. While most people are flattered, some are unwilling to accept the responsibility or have previously unknown reasons for which they might be unable to take on the role. It is also wise to consider appointing an alternate guardian.
So, why is the selection of a guardian such an important issue and how should the issue be approached? Without a will, if both parents are deceased, a custody battle can ensue between surviving relatives. A deceased parent who dies without a will not only foregoes his or her opportunity to nominate a preferred guardian but also exposes the estate and the child to the additional expenses and emotional cost of such a custody battle.
Establish Disability & Life Insurance
One of the biggest mistakes we see people make is that they don’t have a plan for the “what-ifs” in life. They buy insurance to protect their home, their car, and their health, but miss insuring their most important asset…themselves!!!
Disability insurance can help protect your income in the event that you become partially or fully disabled. Group plans at work have limited coverage, and in the event of disability, group policies don’t satisfy a client’s full needs (more often than not) in times of crisis.
There are many different types of life insurance plans to choose from, and your options should be discussed with an independent fiduciary advisor, not an insurance agent representing only one company or product. Alison Wealth Management provides fiduciary guidance on implementing the most appropriate insurance coverage strategies based on your needs. In many cases a blended approach can help you maximize the benefit to your surviving spouse or children in the event of your premature death, but also give you permanent coverage in the event you have a health event later in life and become uninsurable.
At the very least, term life insurance can be purchased at very minimal rates. For example, a $1,000,000 20-year term policy can cost less than $355 per year for a 35-year-old female.
Generally speaking, permanent insurance is generally a better asset to own than term coverage, but if you don’t have the income to afford a permanent policy, the term is a heck of a lot better than being uninsured. As a parent, there really is no excuse to not carry life insurance coverage. Even our wealthiest clients carry life insurance policies in their portfolio for both living benefits as well as death benefits.
Plan childcare budget & funding options
Household expenses change when a baby is born, and those changes continue on throughout childhood. Thinking about all these expenses can become overwhelming, so having a plan in place can eliminate some of the anxiety of mounting expenses and obligations. In the Silicon Valley area, 1st-year childcare costs can range from $19,000 per year to $55,000 per year once you factor in food, childcare, healthcare, clothes, toys, and other miscellaneous purchases according to nerdwallet.com.
There are several key funding options to understand; these can include establishing FSA accounts, tax credits for working families, and employer subsidies.
Something to consider is a dependent care account. If your job offers a Dependent Care Account, you can put aside up to $5,000 in pre-tax dollars to pay for childcare expenses. If both you and your spouse have access to this FSA, the family limit is $5,000 -- but you could get as much as $2,000 in tax savings if your combined contributions reach the maximum.
Establish a Trust & Fund It Properly
One of the only ways to control your assets to provide for your children from beyond the grave is via a trust. It used to be that only the wealthiest families in the world established trusts, but now we are seeing their use become more and more common in other families too. If you have assets that would be used to provide income and economic benefit to your minor child or children, you may want to establish a trust to be the beneficiary of your assets in the event you and your spouse both pass away prematurely. You would have the ability to appoint a trustee who has a fiduciary obligation to act in accordance with your wishes outlined in the trust. This can help ensure that an abusive or scrupulous beneficiary doesn’t blow through the money or assets that should be managed prudently to provide for the minor children’s benefit in the future. Once the children attain an age you set forth in your trust, they can have the ability to dissolve the trust and access the money.
When families are just starting out, they may not have substantial assets and may think that a trust isn’t something they should consider. Let me remind you to go back to point 4, as life insurance gives you the ability to create dollars by spending pennies. For example, paying $350 per year to buy $1,000,000 of term life insurance. At the very least, if you had $1,000,000 of coverage on each spouse, that would leave $2,000,000 of death benefit coverage to provide for the child in the event the parents prematurely passed away. In addition, you may have retirement accounts, brokerage accounts, checking accounts, savings, and real estate that could be protected by establishing a trust in the event something happens to the parents.
Establishing a trust and funding it properly should not be performed without the guidance of a good estate planning attorney and Certified Financial Planner™ working jointly together. Alison Wealth Management provides this service to our clients.
Establish College Funding
Time value of money is an incredible tool to help accumulate assets. It is a basic theory that if you have the ability to earn interest on your money, the sooner you get it invested the greater the ability to grow because of compounding interest. Establishing college savings plans for children when they very young can allow you to take advantage of the time value of money, ultimately allowing you to have accumulated a greater balance at the time your child needs it.
Here is an example:
Let's say you are able to save $200/mo. starting the first month your child is born. Assuming that savings earned a 6% rate of return, it would be worth $77,470 by the time your child is 18.
If you didn't start saving until your child was 5, it would require $329/mo. at a 6% rate of return for that savings to be worth $77,470 by the time your child is 18.
As you can see, it takes 64% more monthly savings to get to the same balance.
There are two main vehicles we recommend for College Funding:
A College 529 is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. Some states provide a state income tax deduction for contributing to a 529 plan, while other states such as California do not. Regardless of your state, contributions become tax-deferred and when you make qualifying withdrawals for college or private school tuition, there is no income tax due. It is important to structure the 529 properly so you don’t accidentally eliminate the student from qualifying for additional financial aid which they might have otherwise been granted.
A second popular college savings plan is permanent cash value life insurance. Like a 529 plan, life insurance allows you to grow your cash value tax-deferred. At the time the student goes to college, withdrawals can be taken out from the policy tax-free if done properly. Unlike the 529 Plan, life insurance is not considered in the FAFSA and CSS calculations of how much money a family must contribute to the cost of college, which makes it an excellent vehicle for funding college, since it doesn’t detract from potential grants, scholarships, and other financial aid. If the child ends up with outside funding or decides college isn’t for them, the cash value in the life insurance policy can be repurposed for retirement for the parents! Lastly, in the unimaginable event that a parent prematurely passes away, the life insurance will provide a substantially leveraged death benefit which could essentially cover the entire price tag of tuition.
As a parent of two children, I know first-hand how exciting it is to create a human life and watch them grow up. Unfortunately, too many individuals become stressed over financial decisions that can arise from trying to raise a family. Alison Wealth Management helps our clients with simple financial planning so they can enjoy the things in life that really matter. Contact us today to learn more!