I am at a point in life where a lot of my friends are having babies. I wrote a really popular post called 8 Ways to Prepare Financially For a Baby where I talked about the basic things that I think are important with respect to preparing financially for a baby. This post goes a step further and addresses the often forgotten aspects of financial planning for a baby.
1. Increase Your Life Insurance
The general rule for life insurance is that if anyone depends on you financially, then you need life insurance. This is because if you die, they will get a death benefit that protects them financially without you being there.
So, if you have kids (or are expecting) and they depend on you financially, you should consider getting life insurance.
If you or your spouse dies and you have life insurance in place, then your family will receive the death benefit from your insurance policy, which will protect your loved ones.
I prefer term life insurance because it is very straightforward and basic – it gets the job done. With term insurance, you pay a premiums for X number of years and if you die within X number of years, you will receive Y benefit (a lump sum). A 20- or 30-year term life insurance policy for a few million dollars is not a bad idea (you can research more on your specific financial needs, but don’t low ball it). The trend I see with young couples is to get a policy for much less than they need (like a $50,000 term policy when they need $1 million). You can check rates for insurance policies here.
It will be a huge tragedy if you or your spouses dies prematurely, but life insurance is one way to ensure your family doesn’t have to worry about finances if this happens.
2. Sign up for Disability Insurance
If you or your spouse becomes disabled and you don’t have disability insurance, you won’t receive income. With disability insurance, you will be paid if you are unable to work (you can sign up for either short-term or long-term disability insurance).
Imagine if the breadwinner in your family became disabled and you had babies to raise without any income. This would be horrible. Disability insurance takes care of the financial aspect by paying you 45-65% of your gross income. Your employer may offer disability insurance, but if it doesn’t, sign up for disability insurance in the open market.
3. Change Your Health Insurance
Your health insurance is another aspect of preparing for a baby that you should review and analyze to make sure it’s appropriate. Look at your plan and compare it to your spouse’s plan. Choose the plan that’s best for you. Don’t forget to do this! Babies get sick so much that good health insurance is essential. It may not be necessary for you to change your plan, but you want to know which plan is best and make an informed decision. Don’t assume the plan you’re on is the one you should stay on.
4. Have an Estate Plan in Place
Pretty much all of my friends who are married with kids do not have an estate plan in place. It’s not on their radar! I would really encourage you that if you are married and having a family that you put an estate plan in place. Get a recommendation for a local lawyer in your state who can prepare an estate plan for you.
If you die or become incapacitated, you need to have a plan in place – this is particularly important as soon as you have kids. As soon as you have kids, you should have an estate plan in place. Your estate plan should include (at the least) a will, health care directives, a power of attorney, and a trust (maybe).
In a will, you state exactly who will inherit all of your property, and you name a guardian to care for your children if something happens to you. Everyone needs a will. If you die without a will (intestate), your heirs will have to go through probate court and it may be very expensive for them. Even if you have a trust, you still need a will because it will address any items outside of the trust. (You can read how to create an estate plan in my post here.)
5. File Taxes Differently
This last item that you may need to look at to financially prepare for a baby is with respect to how you file taxes. When you file your taxes, you can take an additional exemption for each child you have, which will mean you’ll have a greater tax deduction if you take the standard deduction. Additionally, if you make less than $75,000 (or $110,000 if married filing jointly), then you can take the Child Tax Credit, a $1,000 credit available for each dependent child. You can also save money on your taxes if you use daycare through the Child Care Credit, which is worth $600 and $1,050. Even better – if you use your employer’s flex spending account (FSA) for child-care costs, you can allocate up to $5,000 per year to this account, which is a tax-free account. (For more on preparing for taxes as a new parent, see this article.)
While there are important steps to take to prepare financially for a baby, there are 5 things that are often forgotten (probably because they’re not so exciting!). Don’t make the mistake that I see so many new parents make. Remember to review your 1) life insurance, 2) disability insurance, 3) health insurance, 4) estate plan, and 5) tax planning strategies.
Do you have any tips for financially preparing for a baby?
Up Next: 8 Ways to Prepare Financially for a Baby.