Speaking from my own experience, nothing is as thrilling (and simultaneously overwhelming) as the prospect of becoming a parent for the first time. There are so many things to think about and prepare for. You’ve probably been burning the midnight oil calculating how many bottles you need and researching the right brand of stroller for your soon-to-be little one.
These are unquestionably important, but there are other crucial considerations that tend to get lost in the rigamarole of launching your baby registry and getting on daycare waiting lists. How do you protect your family against the unexpected? How do you ensure that your child has opportunities and security? What will happen to your family if you die or become disabled?
This entry boils down these questions into a checklist of four essentials that you should consider addressing sooner rather than later. After all, as you’ve surely heard by now, things aren’t going to get less busy after the baby arrives!
1. Do Some Estate Planning
While I am not an attorney myself, I work closely with attorneys on a regular basis and I know how important proper estate planning can be. As a first-time parent, the overwhelming likelihood is that your estate planning needs are fairly basic, but the protections that those documents afford can be substantial.
The central component of your estate plan is the will, which designates how and to whom your assets and possessions will pass in the event of your or your spouse’s (if you have one) passing. In addition, your basic estate planning documents should include durable powers of attorney and healthcare proxies so that your spouse (or another trusted individual) can make financial and medical decisions on your behalf, if necessary, in the event you are incapacitated. In such a situation, a living will, or advance healthcare directive, will help your loved ones understand how best to carry out your wishes.
The most important aspect of this process is also the hardest: guardianship. Determining who will raise your child in the event that you and your spouse (if you have one) aren’t living is a heart-rending, and frequently contentious, conversation, but it’s essential that you have it. If the worst happens and your wishes weren’t made known, a judge will make the decision for you. This judge will not know you, your family or your wishes, and the hearing may lead to conflict between family members seeking guardianship. All of this can be avoided with a professionally-drafted will.
One last pointer: please consult with an attorney who is experienced in estate planning matters. Estate planning is highly specialized, and you should ensure that the attorney assisting you understands the nuances. Think of it this way: if you needed your appendix removed, your first call wouldn’t be to your dermatologist.
And this goes double for Legal Zoom! A will is not a sub-lease. Spend a little more to make sure your documents are done right.
2. Consider Getting Some Life Insurance
You may already have some life insurance, most likely through your employer. If so, the death benefit is likely to be a rather modest sum. Consider the various demands on that benefit if you were to pass away unexpectedly: making sure that a portion of your income continues to flow into the household; educating your child, paying off debts, and generally ensuring your family’s quality of life. For this reason, it’s very important that you explore the potential value of obtaining additional insurance coverage.
Your employer may offer you the ability to buy up elective life insurance coverage through their plan, but the individual marketplace often offers far better value. Group plans average the cost of insurance across the demographics of the workforce. This means that the premium you pay as a young, healthy non-smoker may be higher than in the individual market because it is skewed by older, unhealthy smokers. In addition, these elective plans are usually not portable, so if you lose your job or switch employers you would likely lose your coverage.
An earlier entry of Industry Insights discusses the different types of life insurance and provides guidance for how each can be beneficial to you, but at the very least you should seriously consider obtaining some term insurance to provide for your family in the event of your premature death.
3. Review Your Disability Insurance
Disability insurance tends to receive less attention than life insurance, but it really shouldn’t, given that an individual currently entering the workforce has a one-in-four chance of becoming disabled for at least one year prior to age 67 as compared to a 3 percent chance of dying within the same timeframe.[1] As a (probably) young person in the earlier stages of your career, your most valuable asset is your ability to earn an income, and the need to protect that asset is now amplified by the fact that you have a baby on the way.
As with life insurance, you may have some form of disability insurance coverage through your employer, but it’s important to understand what you have. Most employer-provided plans offer a disability benefit equivalent to 60 percent of your base salary, and that benefit will be taxable income when received. This often leaves a gap – sometimes a very significant one for those with large incomes or meaningful annual bonuses – from the ideal coverage level.
Do some research. If you have a group plan, find out if you can accept the premiums as taxable income (this would make the benefit tax-free) and whether or not the plan offers a voluntary buy-up that would help close the coverage gap. Explore whether or not individual disability coverage is right for you. Please consult our entry on disability insurance for more information.
4. Start Planning for College
College may seem like a long way off, but the cost of tuition, fees, room and board increased between 24 and 31 percent (depending on the type of institution) over the past decade,[2] so it’s never too early to begin saving.
As soon as your baby has a social security number, you can begin investing in a 529 plan. Investment growth in a 529 is tax-deferred and withdrawals – provided that they are made for qualified educational expenses – are tax-free. Depending on your state of residence, your contributions may also be deductible on your state income taxes. Moreover, 529 plans tend to be low-cost, which means that more of your investment goes to your child’s education than to fund fees and other internal charges. For all of these reasons, 529s should be the centerpiece of your college savings plan.
All 50 states, plus the District of Columbia, offer 529 plans, but, again, do your research. Other states may offer programs with lower fees and more diverse investment options without a residency requirement. Make sure you’re getting the best value for your child.
One word of caution: you may encounter insurance professionals who will pitch cash-value life insurance as a solution that can provide a death benefit while also creating a fund for college tuition and maybe even retirement, too. Before signing up, make sure that you understand the assumptions that lie behind the numbers and how that policy will perform if those assumptions aren’t met. The fact is that if something sounds like it’s too good to be true, it usually is.
I know that topics like those above may sound daunting, but with the proper assistance you’ll find that it will all be pretty straightforward. You are embarking on a new adventure that is completely unlike anything you’ve experienced before, and you should treasure every moment. It is my hope that this entry will give you food for thought and some direction as you prepare to welcome your new arrival.
Let me wish you the very best of luck and so much happiness!
Equitable Advisors and its financial professionals do not provide legal or tax advice. Please seek assistance from an attorney and/or tax advisor based on your individual circumstances.
[1] Maleh, Johanna & Bosley, Tiffany. Disability and Death Probability Tables for Insured Workers Born in 1999. Actuarial Note 2019.6 prepared for U.S. Social Security Administration. Baltimore: Office of the Chief Actuary, 2019.
[2] U.S. Department of Education, National Center for Education Statistics. (2019). Digest of Education Statistics, 2017 (NCES 2018-070), Chapter 3.
https://nces.ed.gov/fastfacts/display.asp?id=76