The top five financial mistakes parents make
September 29, 2009 · Tagged with Family and Home
1. Buying the wrong life insurance — or none at all
It doesn’t cost a bundle for parents in their 20s or 30s to purchase life insurance. But it may mean the world to that parent’s bundle of joy. A working parent may have life insurance through an employer. Do the math and make sure it’s enough.
According to Osuch, there are two ways someone can estimate how much life insurance to buy: Either multiply income by eight or multiply income by six and then add in one-time expenses such as paying off a mortgage or paying for college. It’s also possible to estimate how much is needed by considering only expenses — both one-time costs and living expenses for several years — instead of income, Brooks said.
Both stress, however, that each situation is unique and it’s best to consult with a professional on how much insurance is necessary.
Also give special consideration to the stay-at-home parent, Osuch said. Often a parent not earning an income figures he or she doesn’t need life insurance. But large child-care expenses could appear if a stay-at-home parent dies, she said.
To figure how much a stay-at-home parent needs in life insurance, estimate the costs of replacing the work that the parent does, she said. The figure will likely vary depending on the ages of the family’s children.
Having enough life insurance is especially important for young families to consider, especially since they are more likely to have a tighter cash flow, said Cicily Maton, a financial planner and partner of Chicago-based Aequus Wealth Management Resources.
At the age of 28, Osuch bought herself a 30-year, $250,000 term policy for $165 a year. Mortality tables have changed since 1998 when she bought the policy due to increased life expectancy, thus lowering the rates even more, she said.
2. Ignoring the need for disability insurance
Maybe even more important than life insurance is for parents to have disability insurance, Osuch said. “If you get into a car crash, there’s more of a chance you’re going to be injured than actually die from that,” she said. “Life insurance isn’t going to help you out there.”
Luckily, that expense also can be modest; Osuch recently sold a 36-year-old a disability insurance policy for $34 a month.
When deciding how much insurance to buy, parents should aim to replace at least 60% of their income. Disability insurance most often is paid out on a monthly basis.
As an aside, don’t skimp on liability insurance, Brooks said. Inadequate auto and home coverage is a common mistake across his entire client base.
3. Postponing a will
Young parents often feel healthy and don’t think they need to prepare for the inevitable by drafting a will. But it’s a task they probably shouldn’t put off.
“Younger people don’t have death on their minds,” Maton said, at least not to the same extent that older clients do. But it takes only one related horror story about the consequences of a parent dying without a will to change someone’s perspective, she said.