As some of our clients know, my wife and I happily welcomed a new addition to our family: our second child (a boy this time) was born on Sunday, October 23.
Our last few blog posts have been pretty investment-oriented, so I thought it would be fun to move away from that and more towards the planning side of things. I wanted to peel back the curtains at Woodward Financial Advisors and show how a financial planner thinks about his own comprehensive financial picture, as a way of illustrating some of the things facing new parents.
When my daughter was born 3 years ago, my wife and I shopped for term life insurance policies to cover our mortgage balance, as well as to provide funds that could be put away for an eventual college education. At the time, there was an issue with my wife’s medical record that put her in a less advantageous underwriting class, which resulted in premium amounts that were higher than we really wanted to pay. We thought that the medical issue was temporary, but we needed some amount of insurance on her, and we needed it pretty quickly. We compromised and elected to take a policy with a lower death benefit than we originally wanted.
Fast forward to this year – that medical issue is gone, and my wife qualified for a much higher underwriting class. We chose to get her a brand new policy with a much higher death benefit, and at a lower cost to boot.
On my end, we’ll keep my original policy, since my low premiums are guaranteed for the life of the policy. Instead of buying a brand new policy, we will layer new policies on top of my original one. Our plan is to buy a few policies with different term lengths (e.g., 15 years, 20 years, etc.), so that we can front load a high amount of coverage when our children are very young and the need for replacing my future income stream is greatest. As that insurance need decreases, the various policies will expire and be stripped way. That way, we’re not locked in to paying for a higher level of coverage later on.
Like a lot of couples, we’ve had a hard time deciding on the perfect guardian for our children in the unlikely event of our common death. We went back and forth on this for a long time before our daughter was born before finally settling on our choice.
With the birth of our son, we thought it was important to revisit this choice. As it turns out, a lot has changed in three years. Our original guardians have since had their second child and are living in a much smaller house. While possibly entertaining on television, the idea of potentially adding two more young children into that environment didn’t sound appealing for anyone involved.
Instead, we decided to move the couple that we originally selected as contingent guardians into the primary guardian spot. That couple has children that are much older, and at this point in their lives we think they could better handle having to take care of two younger kids should the unthinkable happen.
I’ll sometimes equate the idea of thinking about eventual cost of a college education for someone born today with the advice you sometimes hear when you sign your first mortgage: keep your eyes from floating to the box that shows the total amount you will pay. Quite frankly, it’s pretty intimidating.
But we know we have time. Before my son was born, we opened a North Carolina Section 529 College Savings Account and listed me as the beneficiary. These plans allow dollars to basically grow free from income tax, provided that any withdrawals go towards qualified higher education expenses, such as tuition, books, fees and, in some cases, room and board. Additionally,North Carolinaresidents can deduct up to $2500/person ($5000 for married couples) of contributions to a North Carolina 529 Plan from their state taxable income.
This is something I encourage expecting parents to do all the time – your child does not need to be born before you can start putting money away for them for college. One benefit of these plans is that you can change the beneficiary at any time, and as long as the new beneficiary is an immediate family member there are no tax consequences.
As soon as we have his Social Security number, we will change the beneficiary designation over to him. We wanted to have the account up and running because we wanted to be able to immediately contribute any cash gifts he received, as well as to increase the amount of time that any funds could grow in a tax-free environment.
While there will be other things we do for our children in a financial planning context, these were three main ones that I thought would be interesting to share. If you or your children are planning on become parents soon, we’re happy to talk about some of the other things you should consider.