There are countless things to consider and evaluate when you are going to become parents. In addition to all of the new furniture purchases, college planning, budget changes, and baby-proofing, there are two very important things that new parents need to review – their life insurance and estate plan.
These are arguably the two most important financial planning topics for new parents to be on top of, but they are also the two things that people tend to ignore or put off until a later date. Why would parents procrastinate on something that it so important to their family’s well-being? The fact of the matter is that life insurance and estate planning are two topics that most people just don’t want to talk about. It is no fun to think about your own demise and picture your growing family without you in it.
What costs should new parents consider when examining their life insurance?
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If one spouse is no longer around, it is likely that the surviving spouse will need to work outside of the home to keep the family going. Childcare expenses can be a large chunk of your monthly income, depending on how many days your children require care, the area you live in, and how old your children are.
· Mortgage and other debt
This is a major expense in most households. If one parent passes away, is there enough income to pay the mortgage and all of the other bills? Many people choose to get at least enough life insurance to pay off the entire balance of the mortgage if one parent were deceased.
· Current and Future education costs
A college education for your child may be a long ways away, but the sooner you start saving for it the better. Some parents choose to carry enough life insurance to pay the full cost of 4 years of college for each of their children. Also, depending on the type of elementary, middle, and high schools that your child attends, there could be some big expenses even before they get to college. Items like school uniforms, field trips, and sports all add up. Many private high schools cost the same or more than many junior colleges.
· Income replacement
This relates to the day to day expenses that we all have to maintain our lifestyle. Groceries, gas, clothing, car/home maintenance, etc. You want to be sure that these run of the mill expenses are accounted for when considering how much insurance you need.
It is common to think that wills and other estate planning documents only apply to “wealthy people” who have a lot of money and other items that need to be passed on to specific individuals or family members. Even if you don’t have any assets to your name, when you have a child, a will is a necessity.
Creating a will is the single most important thing you can do to make sure that your child is cared for by the people you would choose if anything should happen to you. In your Will, you can designate a guardian to care for your child or children if you die before they become adults.
You can also designate a property guardian (usually referred to as a trustee) to manage your money for your children until they are old enough to manage it on their own. These roles can be filled by the same person, or you can choose two different people to carry out the separate roles. Once you have chosen who you would like like to nominate, be sure to inform them of your decision and give them the chance to consider if they would like to accept such a big responsibility. Also, make sure you nominate a successor for each role in case the original person you designate is unable to serve in that capacity.
Thinking about life insurance, estate planning, and your own demise is not a very fun task, but planning ahead could make a big difference for your family’s future.
Jamie Bosse, CFP®, RFC is a Financial Planner at KHC Wealth Management. Jamie is an active member of the Financial Planning Association of Greater Kansas City and can be reached at 913-345-1881 or firstname.lastname@example.org .