Is there anything more joyous than the birth of a child? He or she changes your life forever. You are building the family that perhaps you had only imagined; only now it’s for real, and the time will speed by.
You don’t want to see your little ones grow up too fast, but you do want to be ready for when they do. Their futures are in your hands, and you want to provide for them by giving the very best, and protect them both now and in the future.
Start with life insurance for you
The “term” in term life insurance is just that – a period of time that includes a start date and an end date. Let’s say you are 30 years old, and you purchase a 20-year policy. When you turn 50, the policy ends. But should you die during the term you have been paying into, the policy pays out a lump sum of cash to your family to replace income or cover debts.
“Permanent” life insurance is more expensive than term life even with a similar amount of death benefit. It is considered permanent because the policy covers you for your entire life until you die. And you have choices, from whole life, variable life, universal life, and variable universal life. Because of the guaranteed death benefit, these are considered investments.
Whole life insurance earns a fixed rate of interest; universal life earns a variable rate determined by the insurer; variable life chooses from a variety of investment options and the cash value is tax-deferred; variable universal life uses subaccounts similar to mutual funds and are subject to market fluctuations. Only the growth in the policy’s cash value is tax-deferred.
The third choice is self-insurance. Instead of the insurance company taking on the risk, as it was intended, you do – and you use your own money.
Life insurance for kids
Whole life insurance is used for kids mainly because the cash value is similar to a savings account for them. It is tax-deferred until the money is taken out or the policy is surrendered. If a withdrawal is made that exceeds the premiums paid for the policy, the withdrawal is taxed.
“A whole life insurance policy guarantees a certain percentage return on the cash value and compares well with other conservative savings vehicles like CDs,” says Marvin Feldman, CEO of Life Happens, a consumer education group funded by the life insurance industry. “It isn’t designed to be a primary savings and investment tool. It’s one of the tools for parents and grandparents to consider.”
Are there better, less costly ways to achieve better returns? Life insurance fees do tend to grow over time. But NerdWallet’s finance writer, Barbara Marquand, says some insurance experts remind consumers that in the event of a child’s death, a life insurance payout pays for funeral expenses, family counseling, medical bills, and provides cash if needed. An emergency fund does the same thing. Of course, they must be adequately funded to work.
A 529 savings plan locks in today’s tuition costs for tomorrow’s classes
A recent survey by Nebraska’s NEST 529 College Savings Plan found that 57 percent of Americans are either unfamiliar with or do not know what a 529 college savings plan is. Financial Advisor’s Joyce Blay reported 54 percent of respondents are very likely or somewhat likely they or their child will have to take out student loans to pay for higher education. Today, more than 300 private colleges participate in 529 prepaid tuition programs.
Some states offer prepaid tuition 529 accounts for in-state public colleges that lock in future tuition costs at today’s rate. If an out-of-state or private college is preferred, you can convert the plan. Simply put, a 529 plan can be used to pay for qualified higher education expenses –for tuition, fees, room and board, enrollment, computers, software, required textbooks even bought off-campus, and other related expenses that are required at an eligible educational institution.
Anybody can contribute to a 529 plan
Typically, these plans allow you, or anyone else, to contribute much as you do with a 401(k) or IRA. There are no income limits, no annual contribution limits, and aggregate limits vary by plan. The values will fluctuate because it is invested in the stock market, but over 18 years you have plenty of time to make up any losses.
Families can withdraw up to $10(k) a year from a 529 account to pay for tuition for kindergarten through 12th grade at elementary or secondary public, private or religious schools without federal taxes or penalties. Distributions from these accounts are tax-free. The tuition and fees deduction is an adjustment to income, enabling you or someone else to reduce your taxable income by up to $4,000.
College savings plans are available from your Hefren-Tillotson financial advisor. The benefit to you is the advice, which by now, you are used to getting. So talk with your advisor today to learn more.