3 Steps to Protect Your Family Financially

Most people want the best for their families whether it’s quality time spent together, protection against physical threats or safeguarding their financial security. Your family needs you for emotional, physical and financial support regardless of whether you work or stay at home to raise your family.

If you or your spouse or partner dies or becomes disabled, all your well-considered plans for the future become uncertain if you don’t have financial protection. Immediately, the survivors have to consider how to pay for funeral expenses, meet the ongoing costs of living, pay for college educations and meet other expenses. Stay-at-home spouses are often forced to return to work, and working spouses have to pay for childcare. Survivors have to pay off mortgages and credit cards, fund educations for college-bound kids and protect retirement plans. Three of the best steps you can take to secure your family’s financial well-being include getting life insurance, long-term disability insurance and a 529 savings plan.

1. Life Insurance

Parents need life insurance even when they’re young and healthy. Most millennials don’t worry much about life insurance, but you might want to consider these facts regardless of your age. Term life insurance can provide lots of financial protection until your children are grown at a surprisingly reasonable cost.

For example, a 20-year term life insurance policy for $250,000 would only cost a healthy 30-year-old about $160 per year or $13 per month. [1] If you’re younger than 30, the policy would cost even less according to Life Happens. The insurance benefit can be a lifesaver for families who need to replace the income of a wage earner. Most families would feel the impact of the death of the wage earner within the first month.

The life insurance benefit can be used to pay for childcare, college educations and everyday expenses. If you are the family caregiver, it will take time to transition into the workforce. You’ll also need to pay for daycare and other expenses incurred when raising one or more children. Both spouses need life insurance protection unless the family is extremely wealthy. Even wealthy parents often obtain insurance as additional protection for their loved ones.

2. Long-term Disability Insurance

The Council for Disability Awareness reports that 25 percent of people now in their 20s will become unable to work at some point in their lives. It’s a common occurrence, and it doesn’t have to be some overwhelming physical injury or illness. Simple stresses disable many workers with office-type injuries like carpal tunnel syndrome. Other disabling office injuries include falling down, lifting heavy objects like desks and stacks of paper and injuring the back, neck or spine because you lack the proper ergonomic support.

Long-term disability insurance picks up coverage when short-term disability insurance expires. There are many types of plans to suit your needs and budget, and many plans continue indefinitely until you’re able to return to work. You should consider your options carefully because you have to elect certain benefits when you enroll for your policy.

The benefit of obtaining non-cancelable long-term disability insurance is that the policy can’t be canceled as long as you pay your premiums. When you’re young, your premium will be relatively small, but there is usually a 20 percent surcharge for non-cancelable and guaranteed-rate policies. You can also get guaranteed renewable policies without guaranteed rates, so you should weigh your options and decide whether you are willing to risk your monthly premiums rising as you age.

3. 529 Plans

The right 529 savings plan can fund educational expenses for college and even private schools. These plans come with substantial tax breaks, and you name a beneficiary when you begin a 529 savings plan, so the student’s interests are protected if you die or become injured. Each state except Wyoming offers one or more 529 educational savings plans, so choosing the right vehicle can be difficult.

How to Choose a 529 Plan

529 plans are investment accounts that provide many tax breaks when you use the money as intended for educational expenses. You typically make your contributions after paying federal taxes, but some states allow deductions or tax credits for 529 contributions on state income tax returns.

The savings account grows tax-free while it’s in the account. You can withdraw the money tax-free if you use it to pay for educational expenses. Some of the allowable expenses include:

  • Tuition expenses at any accredited school from elementary school and up
  • Fees and books
  • Room and board

If you withdraw the money for other purposes, your earnings will be taxed and assessed a 10 percent penalty. You can choose your savings plan based on your investment preferences in mutual funds. Each plan offers a preselected group of mutual investments from which you can choose. (More on the available investments can be found in this guide.)

Details About 529 Savings Plans and Prepaid Tuition Plans

Anyone can open a 529 savings plan. You can name anyone you choose as a beneficiary–including yourself. You can change beneficiaries at a later date if the new beneficiary is related to the old beneficiary. The basic benefit of a 529 plan is that it allows you to save money in a tax-advantaged way.

You can also choose prepaid tuition plans that lock in current tuition rates. Prepaid tuition plans allow you to buy units of 1 percent of 1 year of tuition at any state-supported school in your state. This savings approach protects you against inflation. Although you can convert the funding to attend another school, you won’t get the state-supported advantages and guaranteed costs available at the original institute.

529 funds can be used anywhere, however. Your savings grow faster because the earnings aren’t taxed. These earnings remain tax-free as long as you use them for qualified educational expenses anywhere in the United States and in certain international schools. If your state offers an income tax break, you can make bigger contributions without straining your budget.

There is no limit to your annual contributions, but your contributions could trigger taxes under the gift tax rules. In 2018, the gift tax limits your annual contribution to $15,000 per year per child. However, both parents can contribute, so the gift tax limit extends to $30,000 if both parents contribute.

Unlike prepaid tuition plans, you can use your money for any educational expense at any school. Prepaid tuition plans are a better option only if you’re sure that your child will go to a specific college in your home state.

A word of caution is in order. You shouldn’t sacrifice financial security for college expenses, which are still considered a luxury. Kids can have other ideas, so it’s unwise to place more emphasis on saving for college at the expense of financial security in the present.

Financial Security for Your Family

It’s important to spend quality time with your children to foster a sense of security and encourage learning. Providing financial security for your family demonstrates a practical concern that will be appreciated by most children and surviving spouses. Life insurance, disability insurance and 529 educational savings accounts can provide financial security for you and your family at costs you can usually work into your budget.

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