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By Andrew Leckey
When a baby is born, the natural preoccupation is with taking and distributing photos of the adorable child.
That's understandable, but financial considerations should not be far behind. These can include health insurance, parental life insurance, wills, estate plans, investments and other considerations that come with the little bundle of joy.
You can apply for a baby's Social Security number at birth in the hospital, and it will take about 30 days to receive it. You need that number to add the child to any legal or financial documents. You can also add the child as a new dependent on your tax return for the year of birth, but not without that Social Security number.
"Well before the child is born, parents should be talking to their health insurance company to make sure there are no gaps in coverage," advised Cathy Pareto, certified financial planner with Cathy Pareto & Associates in Coral Gables, Fla.
The pregnant mother is covered under her work policy, or that of her spouse, but if the baby needs medical attention after birth, you want to be sure about which policy the child will be included in, she said.
"Figure out who has the better health coverage -- mom or dad if they're both working -- and then get the baby on the right policy," said Bonnie Ashby Hughes, founder and principal of American Capital Planning LLC in Reston, Va. "This will extend back 30 or 60 days so you don't have to file the paperwork the second the baby is born, but you should make the insurer well aware of an additional party on the policy."
Increase the life insurance coverage for both parents, said Pareto, since the loss of either will impact the surviving spouse and the child. "You don't have to get fancy," said Pareto, who believes a simple term insurance policy for 20 to 30 years is sufficient, and premiums will be cheaper than with a whole life policy.
The cost of life insurance will be greater if, besides covering debts left behind, the parents are also trying to pay for college and other expenses in the absence of a parent, said Hughes. With a term life policy, make sure it is a guaranteed renewable policy that assures your payment and coverage will stay the same for the life of the policy.
Make the baby's money a family affair. The child's financial future starts with the parents but can extend to grandparents, aunts, uncles and friends. The more, the merrier.
"A couple of months after our twins, Heidi and Cooper, were born, my husband and I set up and began funding a 529 college savings plan for each of them," said Maureen Blechen of San Rafael, Calif., whose youngsters are now two years old. "We wanted to establish a habit of making yearly contributions."
She got the idea from her grandfather, who set up education accounts for all of his grandchildren. It's a concept that many families have taken to heart these days because the cost of a child amid economic uncertainty is serious business.
"Before your youngster is aware of what gifts are, you have time to ask relatives and friends who love the new baby to make contributions to a college savings account such as a 529 plan," said Hughes. "Start saving as soon as the child is born."
State-administered 529 college savings plans that give tax breaks to savers were introduced in 1997. Those plans with too much money in stocks got hammered in 2008, but they have since generally become more conservative in investment choices and fees have been reduced. Though some plans are offered nationally, check out what investments your state offers and the tax advantages that its plan offers to state residents.
"My son-in-law said when his son was born that a baby can play with a box and a spoon as a toy for a long time, but a contribution to a 529 plan is so much more welcome," recalled Mary Kirtland, CFP with Kirtland Financial Management in Coral Gables, Fla. "As soon as you have a Social Security number, you can direct grandparents, aunts and uncles to make contributions."
The 529 plans are considered parental assets and treated more favorably for financial aid than UTMA (Uniform Transfers to Minors Act) accounts. However, if you pay all tuition, room and board out of the 529, you won't be able to claim an education tax credit. You may wish to invest outside of the 529 as well.
"Don't put a baby as beneficiary on any account unless you have estate planning documents that spell that out," said Hughes. "The parents, either before or after the baby's birth, should have estate planning documents reflect the need for someone to handle the trust and name the child as beneficiary so it all flows."
If parents don't alter documents when the child is born, the courts will need to cover the child, said Pareto. A child under age 18 doesn't have legal authority to take ownership of anything in the event that something happens to the parents. That places increased importance on the naming of a guardian for the child as well as someone responsible for financial decisions until they turn 18. This can be two separate people, she concluded.
Personal Finance - Financial Essentials for New Parents
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