My husband and I just welcomed our first child into the world and have a few questions as new parents. First off, my husband and I both work for companies that provide us with a small amount of life insurance. We can purchase additional insurance through our employers. Is it smart to buy life insurance through your employer? Should we buy life insurance on both me and my spouse? (We are both in our late 20’s and in good health.) My next question deals with the money we received from friends and family following the birth of our child. We received about $5,000 that we want to invest for our child’s college. We are debating whether we should open a Roth IRA for our child or a 529 Plan. Any recommendations? And finally, a few questions in regards to our will. In a past column you talked about a free will through the State of Michigan, which we are using. Do we need to name a relative as the guardian of our child, or can it be a friend? Neither of our parents are physically capable of taking guardianship, and my husband and I are both the only children of our parents.
Thank you for your help and advice.
Congratulations to you and your husband on the birth of your child. I also want to congratulate you for thinking about the issues that you have mentioned. These are important issues and, unfortunately, too many parents don’t address them which can cause problems in the future.
In looking at your life insurance needs, for someone in your situation I would generally recommend that you take what the company is offering for free but that you also purchase additional life insurance outside the company. My reasoning is that typically when you purchase life insurance through your employer, your coverage ends if you were to leave your employer. Therefore, if you lost your job or quit you would no longer have coverage. Depending upon your health situation at the time, it may be difficult and expensive to obtain new coverage. Therefore, while you’re young and healthy, it makes sense to purchase a policy separately. Even if that policy costs you a little extra money it would be worth it. That being said, term insurance has become very competitive, and it is not unusual for someone who is young and in good health to be able to find a policy at an even lower price than through your employer.
With regards to whether you insure both you and your husband, the question you need to ask yourself is, if one of you passes away, does the other spouse earn enough to support the family. If the answer is no, then you do need life insurance on both you and your husband. You may not need the same amount of insurance on both of you, but if your family could not live on one income, life insurance would be needed.
With regards to the Roth IRA vs. a 529 Plan, unfortunately, at this point your child is not eligible for a Roth IRA. In order to contribute money into a Roth IRA, your child must have earned income. Earned income is income from your labor. Since a newborn does not work, they would not be eligible for a Roth IRA. Instead, a 529 Plan like the Michigan Education Savings Plan (www.misaves.com) is a great way to save for college. One of the great benefits of a 529 is that the money and all the income it earns can eventually be withdrawn tax free, as long as it’s used for a qualified education expense. I am a big fan of 529 Plans, and I do think they are the best way to save for a child’s future educational needs.
With regards to the will, you are under no obligation to name a relative as the guardian of your child. As far as I’m concerned, the key to naming a guardian is to name someone who you believe would best raise your child. In many situations it is a family member, however, relatives don’t always make the best option. As a parent, you have obligations to your child and one of those obligations is to have a plan in place in the unlikely event that your child would lose their parents. No one likes to think of their own demise; however, when you have a child, it is critical that you have a will and in that will you name a guardian who will best protect and raise your child.
Being a new parent is exciting and it does come with both legal and financial obligations. The sooner you handle these issues, not only will it give you a sense of relief, but it will also protect your child, and I’m sure you would agree that’s what it’s all about.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.