In our rules-based society, we sometimes make financial decisions as lemmings - we assume that if we follow the rules, everything will work out.
For example, everyone is required to have home and auto insurance, and as of the last couple of years, everyone is required to have health insurance, or face some stiff consequences. Having these coverages in place, however, does not mean that all of your problems are solved if your house burns down, you wreck your car, or you get sick. And, I can tell you that there are vast differences in the options available to you. Unless you've been through a loss or catastrophe with one of the above, you probably just nodded and said, "Of course, I get it." Trust me. You don't. Not yet anyway, knock on wood!
These are simply the things you're required to do, and let's face it - if you're not completely up to speed on what you have to do, I know the majority of you, while you're super smart and beautiful people, are probably not properly informed on the optional choices.
Within that realm, I'd like to give you a couple of ideas today of things you can do with your money for your children that will not only help them, but, if done correctly, can also help save you money on the taxes you pay, on the amount of money coming out of your budget for your children, and can lead to more money in your pocket after the kids are out of the house and properly educated - whatever your version of that looks like.
Often, we hear from parents way too early about setting up college savings for their child. I've gotten calls so early that I had to stop and ask the due date, just to make sure the mom-to-be was actually already pregnant! I certainly appreciate those of you with that kind of go get 'em attitude, but - note to new parents - we still have to wait for both a birth certificate and a Social Security card on your little one to set that account up.
A college savings account, often referred to as a 529 plan, allows for the earnings in the account to grow, tax-free, and that money is not taxed when taken out to pay for qualified educational expenses. In addition, new tax laws that went into effect in January allow for up to $10,000 of tuition to be taken out for private, public or religious elementary and secondary schools per year, per beneficiary (child). If you're in the boat where you're paying tuition to any elementary, secondary or college institution, or you have parents who want to help fund your children's tuition (there's a special place in heaven for these folks!), 529 plans are an ideal vehicle. You can save for education costs, invest the money for growth, and use these funds for many of these expenses, while being tax efficient.
Also, keep in mind that 529 accounts allow the owner of the account to be in control (although anyone can contribute to it). The beneficiary (the child) has no legal rights to the money in the account. This ensures that they can't use those funds for a Corvette instead of college.
There's a lot more to this topic, but for the purposes of this newsletter, I'm not going to go into any more detail. If you'd like more details, please, let us know.
Second, let's talk about life insurance for kids. Just like saving for college is not required, you're not obligated to buy life insurance for your children, or yourself. Personally, I believe you should have a reasonable permanent life insurance policy for each of your children - I do. And, it's a perfect time to take those out when they're still at a young age. All you're trying to do is guarantee insurability when that child turns 18 and, if taken out when an infant, protects the expenses that come with raising a child, and covers the child's ability to use insurance moving forward.
At the end of the day, when you have a healthy, normal, independent, I-don't-need-your-help 18- or 21-year-old, this could also help fund a down payment on a first home, pay for that car for graduation, or a ring for a pretty girl. The point is, the small amount you put in while the child is young can add up to a decent cash value over time, and benefit them in the future that will come faster than you can imagine.
You can also buy permanent life insurance on yourself in conjunction with starting a 529 plan. Often people know the cost of the University of Kentucky and that it goes up every year. When we show them they'll need a quarter of a million to pay for UK in 20 years, they respond by saying their kids will get scholarships, and they wouldn't want to waste their money. Now, I know all of our children are Rhodes Scholars. But just in case that doesn't go as planned, we typically recommend saving half that cost in a 529, and the other half in permanent life insurance for the parents. That way, once the 529 is used up, you're able to loan yourself the remainder from the life insurance cash value.*
There's also a lot more to cover on this topic, but once again, for brevity's sake, I'm not going into any more detail. Want to know more? Let us know!
These are just two of the simplest ways to pay for your children's education that we use on a daily basis with our client families. We'd love to talk to you about your situation, and how these could fit into your plans and goals for your family.