Talking about what happens to your family if tragedy strikes is certainly no picnic. But planning to protect your family through tough times is one of the most important ways to show your love. Here are three must-haves for young families.
Cash cushion. Rainy day fund. Whatever you want to call it, having money set aside is critical for your family’s financial security. If money is tight, make a goal of saving $1000, a sum that can keep you from reaching for the credit card when an unexpected bill arrives. Ideally, families will have three to six months of expenses saved. If you have a one-income family or a job with fluctuating income, saving six months is the minimum. It’s less daunting than you think. These are your bare bones expenses — the grocery bill sans ice cream, the utilities without cable, the mortgage, keeping the lights on.
Where to save? In an easy, but not-too-easy to access account, such as an online savings account with INGDirect.com or smartypig.com. Don’t worry about making this money grow. This is your financial safety blanket, not your stock picking fund.
Nearly 35 million U.S. households have no life insurance. Of those, 11 million have minor children, according to the insurance group LIMRA. Paying an insurance premium certainly isn’t the main priority for someone out of work or struggling with debt. But healthy young families? They can buy a term insurance policy for less than the price of cable TV each month.
Term insurance offers protection over a set period of time, as the name suggests. Many families buy 20 or 30 year terms, or until kids are out of college. A healthy, 35-year-old dad could buy a term policy for around $150 a year. A couple hundred dollars more could buy a $1 million policy. You can research prices online at a site such as insure.com.
There is also life insurance called “whole life.” These policies have an investment component and allow policyholders to borrow against the cash value of the policy. But the premiums are higher. Most certified financial planners say that for average families, buying a term policy and investing the additional money you would have spent on a whole life premium makes more sense.
Many employers also offer life insurance, but it tends to be more expensive than on the open market because it’s offered to sick and healthy employees alike. The site lifehappens.org has a wealth of info on this subject. Disability can also mean a major blow for a family’s finances. See if your employer offers long-term disability insurance. If they do, buy it. Disability insurance will replace your income if you can’t work, which is more common than you’d think: The Social Security Administration says a 20-year-old worker has a three in 10 chance of becoming disabled.
I admit it. Our will is out of date. And we didn’t even have one until after our second child was born. But it’s a critical piece of planning for your family’s well being, especially if you have children and need to select guardians. You can hire a lawyer to write your will, but if your situation is fairly straightforward and you don’t have money to protect in a trust, you can also use will preparation software. I used Quicken’s Willmaker, which cost around $40.
Aware that many families balk at the cost of a lawyer-created will, which can easily exceed $1000, some lawyers have gotten creative. A couple of years ago I attended a will-making party. A lawyer consulted with families over email and drafted wills in advance. Then, over wine and cheese at a host’s house, the families gathered and put the finishing touches on their wills with the lawyer. It’s a great idea, and one I’d love to see spread. In addition to your will, make sure your family knows where to find your important papers. And fill out a health care directive, which you can find at cehd.umn.edu.
Kara McGuire is a personal finance writer and a St. Paul mother
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