Michelle Sun gives young families and couples just starting out their household, a list of to-do items such as estate planning, life insurance, disability insurance and basic investments.
With the birth of a new child comes the celebration of life, but with younger kids comes more financial responsibility and care, especially during the first few years after their birth. A new family with young kids has much different priorities than an older family with adult children.
The types of protection important to a young family consist of:
When these strategies are in place, peace of mine is secured. This will lower stress levels in uncertain and stressful times, especially in early child rearing years.
Consider the typical young family:
A newlywed couple has one baby and is expecting their second. The father is the primary breadwinner and commutes everyday to work, while the mother stays at home in order to care for the children and is awaiting her next child. During his daily commute the father gets into a terrible car crash, and one of two things happen:
- He becomes disabled for a period of time (Disability Insurance)
- He passes away due to his injuries (Life Insurance)
So what do you do? What happens now? Both outcomes are horrible, as they spell sadness, pain and especially financial trouble.
Consider the worst-case scenario should the father pass away. In order to minimize what may come from this awful situation, let’s assume the husband was able to get a 30-year term plan for himself for cases like these. Because the typical home mortgage period lasts 30 years, he also selects a bit more coverage (above just the mortgage liability) so as to ensure his family lives comfortably should he pass away. In this scenario, his wife can stay at home caring for the children until they are old enough for school before she even has to think about re-entering the job force. Ultimately this puts much less stress on the grieving wife, children, as well as others involved in the accident.
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The estate plan also ensures that there are no issues with transfer of title. In California, most property is held in community property (with rights of survivorship). However, there are cases where the surviving spouse is forced to go to probate court because their house was titled as “separate property”. Without an estate plan on separate property (which is very common when you purchase a property before you get married), you are at risk of probate.
An estate plan is also important in this father’s case, to at least get the basic “living” documents in place. The Advanced Health Care Directive and the Financial Power of Attorney should be something in place so the mother can continue paying bills and make timely medical decisions for her husband during his time in the hospital, no matter what the result was.
Check here to take the estate plan quiz and see how prepared you are.
In the event that the father becomes temporarily disabled, his income to the family is crucial during the recovery period. With this comes the importance of disability insurance, which allows for a percentage of the income that the father would have otherwise earned to be afforded to him during this recovery period. For example, if he were to earn $100,000 annually, during disability the family would still be able to receive upwards of $70,000 to maintain quality of life. This is usually after tax dollars too.
Without money to pay expenses, the children’s future is compromised, and any estate that the family owns might need to be sold in order to take care of bills. The family’s entire lifestyle could be altered due to this uncontrollable event, leaving the mother powerless as she must now care for her husband along with her two babies.
A young family should also look into a tax advantaged investment vehicle, such as an Individual Retirement Account (IRA) or contributions to the employer’s 401(k) plan. In addition, a 529 College Savings account could make sense to get a head start for college in a tax advantaged way. In addition, these vehicles also enforce much-needed discipline in the form of systematic monthly savings.
Take Action Now
Early action planning is so important to peace of mind for family members. Taking our life insurance quiz and estate planning quiz will help you get started. Speaking with a competent financial advisor will further allow you to be able to understand more customized options in order to best suit your needs.