Starting to Build a Safety Net
First comes love. Then comes marriage. Then comes baby in a baby carriage -- and a swing and a dozen diapers a day. It's enough to stretch your budget to the breaking point. On top of these new expenses are the myriad financial "must-dos," from buying life insurance to saving for college, that you've heard about from friends and family. Just thinking about this financial to-do list is almost as overwhelming as taking care of your newborn. So what task do you tackle first? We've simplified matters by boiling everything down to five steps in their order of importance.
1. Buy Life Insurance
Job one for every parent is ensuring the safety of the children. That means getting life insurance, which will pay a chunk of money to your survivors should you go before your time. "A lot of parents I know just keep putting off buying life insurance," says Alexandria Cruey, of Norwalk, Ohio, who has a 9-month-old son. "But it's hard enough to raise a kid on two incomes. I can't imagine doing it alone." There are many life insurance options, but for 99 percent of new parents, term life makes the most sense, says Bob Hunter, director of insurance for the Consumer Federation of America. It covers the insured person for a period of time and pays a benefit if he dies during that term.
You'll need to decide how much money your heirs will receive if you die. To come up with that figure, multiply your annual income (or, for a stay-at-home parent, the cost of replacement childcare) by the number of years you want to provide financial support. "For a sole breadwinner who wants to cover the family for the long term, a good approach is 10 or 12 times the salary," says Steve Weisbart, an economist with the Insurance Information Institute. For a two-income family, five to eight times for each parent might be enough.
It's a good idea to decide how long you want to be insured and to lock in a fixed annual price for that period so your premiums won't increase annually. If you have a baby, a 20- to 30-year term means that your child will be on his own when the policy ends.
How much is all of this going to cost? A healthy 30-year-old nonsmoker can expect to pay about $350 per year for a 30-year policy worth $500,000, or $500 a year for a $1-million policy. If you have a special-needs child who will remain a dependent for your life and beyond, you might consider whole life insurance, which provides coverage for an individual's whole life rather than for a specified term. Included is a savings component, called cash value or loan value, which also serves as an investment tool. (For more information about whole life insurance, go to iii.org/individuals/life.)
Whatever plan you choose, shop around for quotes from both independent agents and insurers, and buy from a solid company that will be around for the long term. Check out any insurer's financial-health rating at ambest.com.