If you have kids, you know the drill. Softball practice, dance class and homework. And that’s just one night. While activity is good, in your fast-paced life it can be easy to overlook some key financial strategies to ensure your child is set up properly for the future.
When considering how to thoughtfully include your child into your financial strategy, there are three areas of focus: Protect, Provide and Empower.
There are several important things you’ll want to do after the birth of your child. You need to make sure your life insurance coverage is adequate and up to date. And you’ll want to write your will, and execute a durable power of attorney and health care proxy. That might sound like a downer at such a joyous moment in your life, but if you don’t handle these important duties, your child may be negatively affected.
- Life insurance protects your child against the family’s loss of income and lifestyle if you or your spouse dies. You may have some group life insurance at work, but typically this kind of coverage isn’t enough to replace your income for the number of years you need. Now is the time to purchase personal life insurance.
- A good rule of thumb is to purchase a multiple of your household income, perhaps up to 30 times, and review your coverage if your income increases. But if you want to make sure that down the road your child can go to college or start a business of their own, you may need more coverage. And, if you have a one-income household, you should still get coverage on your non-working spouse to replace the cost of childcare and domestic work they provide.
- A will, just like life insurance, protects your child if something happens to you. A will allows you to distribute your assets to your children as you desire, either outright, to the custodian of your minor child, or to a trust in their name, managed by your designated trustee. A will also names the guardian(s) of your minor children. You want to choose someone who will love and nurture your child and share the same values and traditions. If you die without a will, the court will determine who plays this important role for your child, and your state will determine how your assets are distributed.
- A letter of intent, often tied to your will, is a non-legal document that shares important and useful information for your family after you die. Information like passwords, contact information, location of documents and charities can be included. But more personal information can also be included like names of babysitters, family traditions and care of pets, all of which are important for your child. Letters of intent take on more importance for a child with special needs. Therapists, sensory issues and schedule structures are all very important and should be spelled out in your letter of intent.
Durable Financial Power of Attorney and Health Care Proxy/Declaration
- Two other documents that can also help protect your child are a durable financial power of attorney and a health care proxy/declaration.
- A durable financial power of attorney allows you to appoint someone to make financial decisions on your behalf if you become incapacitated. This protects your child from having a court-appointed conservator manage your finances, perhaps not in their best interest.
- A health care proxy/declaration allows you to appoint someone as your health care agent, to be informed of your medical condition and make medical decisions for you if you’re unable to do so.
As your child grows, you naturally provide for their daily needs. But, you should also take action to provide for their future needs as well.
- Gifting life insurance is becoming more and more popular. Paying for or funding life insurance for your child or grandchild can help them start down the right path to their future. Buying life insurance for them while they are young locks in their insurability at low rates and builds cash value that they can use for their education, starting a business or buying a home.
- As your child prepares for college, you might consider co-signing on their loan, which may help them get a better interest rate, as well as build their credit. Because you’d be liable for the loan if your child dies, they should have a life insurance policy in place, with you as the beneficiary. Then, you can use the proceeds of the policy to pay off their loan in the event of their death.
- When your child turns 18, they’re now an adult, and legally, you have no say over their medical and financial decisions. They’ll still want your guidance to help them make good decisions. That’s why you should encourage them to also execute a durable power of attorney and health care proxy/declaration.
- If you are a parent of a child with special needs, you know that providing for them likely will go beyond their 18th birthday. Your plan should include the means to continue their care in your retirement and after you die. Strategies for developing a three-person retirement, transferring the physical care of them to someone else and covering added expenses should all be taken into consideration.
You did it. Your child has moved out of the house and is living on their own. They’ll be off to a great start because you set a good example and taught them about money. You managed your debt wisely, reduced unnecessary spending, worked to increase your income, and established and kept within a budget. You showed them the importance of saving and helped them build their credit, along with their financial acumen.
And because you’ve protected and provided for your children through these means, you’ll empower them to lead a financially responsible life — hopefully beginning the cycle again with their own children. If you’d like to learn more about protecting your child’s future and setting them up for success, contact one of our financial professionals.
This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. Always consult your legal or tax professionals for specific information regarding your individual situation.