Protecting Your Family: Financial Planning Issues
No one depends on you financially as much as your children. You need an insurance plan that will protect them in the event you're no longer able to provide for them. That plan should include:
- Disability insurance, which pays you a monthly income if an accident or illness prevents you from working, and
- Life insurance, which pays a sum of money your family can use to replace your income if you die.
- College Funding, so your child can enjoy the benefits of higher education without being saddled with big loans.
Things you should know about Disability Insurance
Your chance of becoming disabled is greater
than you probably realize
Its a sobering fact: If you are under 65, your chance of becoming disabled for
90 days or longer is twice as likely as your chance of dying. If you were unable
to work for a few weeks, months or even years, what would happen to your family?
Thinking Social Security? You may want to
think again…
Social Security doesn't provide adequate coverage, in most cases. Social
Security does pay some disability benefits -- but qualifying for them is much
harder than most people realize. Social Security typically pays disability
benefits only if you are diagnosed with a fatal illness, or if your physical or
mental disability makes you unable to do any kind of work for at least 12
months. Even then, you won't receive any Social Security payments for the first
six months after you become disabled. You can create a much more effective
safety net for your children by purchasing a disability insurance policy of your
own.
Your disability benefits could be tax-free
Usually, if you pay for disability insurance with after-tax dollars, any
benefits you receive will be tax-free. Since taxes won't be taken out of your
disability insurance payments, you don't need to replace 100% of your gross
income in order to maintain your current take home pay. (That's good, because
insurers don't sell policies that replace 100% of your income; most disability
coverage replaces only up to 60% - 70% of your gross income because insurance
companies want you to be motivated to get well and return to work).
To figure out how much disability insurance you need, consider all of your monthly expenses. In addition to the basics (food, shelter and clothing), be sure to include expenses like doctors' bills for the kids' regular check-ups, and the cost of day-care, school tuition, and extracurricular activities, etc. What expenses would increase if you were disabled? What expenses would disappear? How much income could you count on from other sources, like savings or investments, or an employer-sponsored group disability policy? Consider all of these factors to determine the amount of disability coverage necessary to protect your family.
How do I learn more about disability insurance?
Things you should know about Life Insurance
You may not have enough
Your biggest expense for years to come will be all the costs associated with
raising your children. It's important to make sure your family could meet that
expense if you died tomorrow. In fact, each breadwinner in your family should
have life insurance coverage.
In evaluating your life insurance needs, you should make sure the policy is big enough to cover immediate financial expenses -- like funeral costs and outstanding loans -- plus ongoing household living expenses like mortgage and utility payments, as well as bills for food and clothing. You probably also want enough coverage to meet big future expenses like your children's college tuition.
You may want to designate primary and
secondary beneficiaries.
If your spouse is the primary beneficiary of your policy, consider designating
your children as secondary beneficiaries. This may make the process of
collecting on the insurance policies quicker in case something happened to both
parents at the same time. (And while we're on that subject, you and your spouse
should both consider having wills that name a guardian for your children and a
trustee to manage the life insurance money for them if anything happens to you.)