We have exciting news! Linnea and I are expecting our second child in April 2020.
Our daughter Elin could not be more excited! She is busy preparing to be a big sister in all areas of her life. Last month she transitioned to a “big girl” bed, her car seat is now forward facing, she has been practicing swaddling her baby doll and she tells us she has been working on her muscles so that she can hold the baby.
Elin’s big sister preparation got us thinking about all the areas we need to prepare for a new baby too; including what we need to be doing financially. This month’s article will provide an overview of how to prepare financially for your new arrival.
Health Insurance and Doctor/Hospital Selection
The largest expense families typically have during pregnancy is the cost of prenatal care and delivery. For both private health insurance and employer health insurance plans, open enrollment occurs in November and allows individuals to switch medical plans beginning on January 1st. Given that the cost of care can easily be upward of $20,000 for a hospital delivery, it is imperative that you understand how your health plan will cover these costs. The first item is to ensure that your doctors and hospitals are in-network with your medical insurance provider as this can significantly reduce your out of pocket cost. In addition, pay attention to your deductible and maximum out-of-pocket costs for the plan as this will help determine the amount of cash you will need to set aside for medical bills within the upcoming months..
As an example:
Let’s assume that the deductible for your medical insurance is $6,000 per year and the maximum out of pocket is $9,000 per year. Let’s also assume that the plan pays 80% of the costs once you hit the deductible. This means that you are responsible to pay the first $6,000 of medical bills before the medical insurance pays out. Then after $6,000, you will pay 20% of all future bills for the year until you reach the maximum out of pocket amount of $9,000. Depending on plans available with your health insurance, it could make sense to switch plans for the year in which you will be having the baby.
Childcare/Maternity and Paternity Leave/Employment Arrangements
After reviewing your medical insurance coverage, the next step is to determine what arrangements need to be made with your employer and childcare providers. Here are a few items to think about:
- Will the parent(s) be taking leave following the birth?
- How long is the leave?
- Will the leave be paid or unpaid?
- If unpaid, is short term-disability available to cover lost income?
- Will the parent(s) be returning to work full-time?
- If so, will childcare be needed?
- If not, how will this affect your employer benefits?
- If childcare is needed, do the childcare providers in your area have a waiting list?
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planning insights from Mike
planning insights from Mike
If available to you, it is typically beneficial to take advantage of a Health Savings Account (HSA) and/or Dependent Care Flexible Spending Account (FSA). These accounts allow you to save money on taxes while also saving for out-of-pocket medical expenses that you will incur during the pregnancy and delivery. Check on the maximum contribution limits per calendar year to avoid any penalties for excess contributions. In addition to the maximum contribution limits, pay attention to which expenses are considered qualified for the FSA and use that money first. Any additional qualified medical expenses beyond the FSA funds, can be taken from the HSA. This is recommended because FSA funds are lost if not used during the calendar year, whereas HSA funds remain in the account if not used. See the April 2019 blog article for more information on HSA’s.
Life Insurance Coverage
Both parents need to review their life insurance coverage to ensure that they are properly insured based on the wishes they have for their surviving spouse and heirs.
As an example:
Let’s assume that several years ago a couple took out life insurance in the amount of 1 million dollars for each parent and are paying $150 per month in premiums. The death benefit was selected based on their goals to pay off the mortgage, provide 5 years of living expenses to the surviving spouse, and to fully fund their kid’s college education in the event that one of them dies when the kids are still financially dependent. Now that a new child is being added to the family, each parent may need to purchase an additional $250,000 in coverage to cover the college education goal which will add approx. $40 per month in premium.
Estate Planning Documents and Beneficiaries
When a child is added to the family, there are legal issues that need to be considered. The first and most important is to confirm that a will is in place which details who will become the legal caregiver of minor children if both parents die prematurely. If a will is already in place, review the document to make certain that the person chosen for this responsibility is still in line with your wishes. In addition to the will, you will want to ensure your beneficiaries are updated as well. If your children are listed as beneficiaries on your accounts, you will want to add your new baby as a beneficiary to avoid being accidently disinherited. As part of this exercise, check your beneficiaries at work to ensure those are updated on your employer benefits.
Child/College Savings Account
If significant financial gifts are given by family members or friends upon your baby’s arrival, it is important to establish an account for your child that can receive the funds being given. These accounts may include a standard savings account at the bank, a brokerage account at your preferred custodian (Schwab, TD Ameritrade, Vanguard, etc.), or a 529 plan for educational savings. The type of account you open will depend on how you want the money to be used in the future, whether certain tax benefits are important to you, and the contributions you are planning to make into these accounts. For more information on how much your child’s savings can grow, see the May 2019 blog article.
A checklist has been provided along with this article that you can download, and it highlights the areas discussed in addition to other topics which are important to consider when having a baby. If you need additional help or have questions on how to implement a financial plan to prepare for a new baby, please don’t hesitate to contact me.