As you prepare for life with your new child, it’s time to prepare a new financial plan for your family or make any necessary changes to your existing plan. You’ll want to consider how your baby will affect your budget, make sure you have adequate insurance, protect your child’s future with a well-thought-out estate plan, and determine how having a child will affect your income taxes.
Estate planning issues
Estate planning is a subject many parents would like to avoid. After all, you’re celebrating new life, and it’s sad to think that you may not be around to raise your child. However, it’s crucial to the welfare of your child that you leave behind instructions that clarify your wishes in the unlikely event that you die before your child grows up. If you don’t currently have a will, now is the time for you (and your partner, if any) to draw one up. If you do have a will, you’ll need to review it. You’ll want to nominate a guardian for your child and decide how you want your assets distributed. You may also consider setting up a trust to protect your child’s interests after your death. You should also review your beneficiary designations.
Wills
Each parent should have a will to ensure smooth distribution of his or her estate. After your child is born, you should review your will (or draw up a will if you don’t already have one) to make sure that your assets are distributed as you would like, to nominate a guardian for your child, and to choose an executor for your estate.
Tip: You may want to write a letter to your child that will be your testament (i.e., a message from you that your child can read at a future date). It can be about anything–your philosophy on life, the family history, or some advice that you’d like to give your child. You can attach a copy to your will or put it in with your important records for safekeeping.
Example(s): When her daughter Sara was born, Emily wrote a letter to her that described the night Sara was born and Emily’s hopes and dreams for Sara’s future. When Emily was killed in a car accident the year Sara turned 16, Sara read the letter and found out that her mother was proud of her and really wanted her to attend college. So Sara worked hard the next two years of school so that she could get into the local university.
Nominating a guardian
Choosing a guardian for your child is very important. If you die without naming a guardian for your child, it will be up to the court to do it for you, and the person whom the judge names may not be the person you would have chosen to look out for your child. When choosing a guardian, look for someone who will look out for the best interests of your child, preferably someone who has the time and energy to meet the demands of raising a child. Make sure that you ask a potential guardian whether he or she would like to serve as your child’s guardian. Often someone you think is the perfect choice really doesn’t want the responsibility. For this reason, you should also nominate a contingent guardian.
Periodically rethink your choice of guardian. As your children grow older, you can ask them whom they would like to live with in the event you die. Although this can be a scary subject for children, it’s important to raise the issue with them. In addition, once your children are old enough, tell them whom their guardian will be in the event you die.
Setting up a trust
Setting up a trust can be a good way of passing your assets along to your child. A trust document lists how you want any money left to your children spent, and it can ensure that your child’s money is protected. A trust can help the guardian manage assets and make sure that estate funds are used to benefit your children according to your wishes.
Insurance issues
Before your child is born, review your insurance coverage to make sure that you and your family are adequately protected. If you or your spouse is going to quit your job(s), you may cut off your life, disability, or health insurance benefits from that job, and you’ll need to buy more coverage.
Life insurance
Having a child will increase your need for life insurance coverage. Many experts recommend that you have life insurance equal to five times your annual salary.
Health insurance
The best time to check your maternity coverage is before you become pregnant. Make sure that you understand your deductibles, your co-payments (if any), and whether your policy covers testing, emergency care, and all the costs of delivery (including anesthesia, if necessary). Find out about claims-handling procedures, how long you will be able to stay in the hospital once you’ve been admitted for delivery, and whether your choice of doctors is limited. Usually, your baby will be covered from the time of birth, but check your insurance policy anyway to make sure. If both you and your partner are covered by or eligible for coverage under an employer-sponsored policy, you may need to decide which policy offers the best (or most cost-effective) family coverage.
Disability insurance
Before you had a child, you may not have worried about becoming disabled. Now that you’re planning to have a child, you may be thinking about what would happen if you suffered an injury or illness and couldn’t work for days, months, or even years. If you’re married, you may be able to rely on your spouse for income, but could your spouse really support all of you?
Example(s): Bob worked as an accountant, a relatively nonhazardous occupation. However, on Christmas Eve, he broke both wrists when he slipped and fell on a patch of ice. Since his injury was not work-related, he wasn’t eligible to receive workers’ compensation insurance. In addition, he wasn’t covered by an individual or group disability policy. His wife was working full-time as a seamstress but wasn’t able to support Bob and their children on her salary alone. Within a few weeks, they were financially destitute.
To protect your family in case your income is cut off due to disability, consider purchasing disability insurance if you don’t already have it. You may have a group disability policy through your employer or you may want to purchase an individual disability insurance policy. A disability policy won’t replace your total income, but it will likely replace 50 to 70 percent of your earnings.
Income tax considerations
At tax time, you’ll find out that some financial benefits can help defray the cost of raising a child. You’ll suddenly be eligible for an extra exemption, and you may be eligible for one or more tax credits.
Exemptions
When you file your income tax return, you may be able to claim an exemption for you, your spouse, and your dependents if your adjusted gross income is below a certain phaseout amount. This means that when you file your income tax return in the year of your child’s birth (and ensuing years), you’ll be able to claim an extra exemption that will reduce your tax liability.
Tax credits
Having a child might enable you to qualify for one or more tax credits. Credits related to children are the child and dependent care tax credit (if you have qualifying child-care expenses), the child tax credit, and the earned income credit (if you have income under a certain level, having a child raises the amount of income you can have and still claim the credit).