📈New Baby Financial Checklist

Alex is up this week. This week’s post is short on jokes and long on actionable information (hopefully). If you know someone who is about to have a kid, just had a kid, or you’re expecting a child yourself, this would be a good post to share around!

As subscribers to this newsletter know, my wife and I welcomed our second child at the end of April. Amidst the swirl of happiness and exhaustion, there are three financial tasks to prioritize (after you finally get some sleep): life insurance, education expenses, and updating beneficiaries.

Yeah, I know that sounds very responsible and adult and probably the last thing you want to think about as you cradle your newborn, but they’re important enough to prioritize before you get too far along into parenting. Trust me: life acquires its own particular momentum after you throw a kid into the mix. Things can get pushed down the to-do list for years if you let it.

Life Insurance

Your spouse and child(ren) now have what’s known as an “insurable interest” in your life. Meaning, they stand to suffer a financial loss if you were to die unexpectedly, and therefore it makes sense (it’s “suitable”) to hedge that risk with an insurance policy.

Do not buy a whole life or permanent policy. These policies are expensive and only suitable in a narrow set of circumstances that don’t include “having a child.” Instead, you want to look at buying a term policy.

Term life insurance is a type of life insurance policy that provides coverage for a specified period, or "term.” If you pass away while the policy is in effect, the insurance company pays out a death benefit to your beneficiaries.

Two things to know when you look at a term policy: face value and term.

Term refers to how long the policy will cover you. Speaking generally, consider two term lengths, either 20 years or 30 years. It’s up to you which one is a better fit. My wife and I each bought 20 year term policies.

The second thing is face value. This is the death benefit the insurance company will pay in the event you or your spouse dies during the 20 or 30 year term.

Here’s the trick: face value drives a lot of the final premium. It’s worth noting that there’s a real chance you’re going to pay the premiums for term every year for the next 20 years and never use it (aka die). So, it’s important to get the about the right amount and not a penny more.

How much to buy? Add up all your debt (student loans, mortgage balance, credit cards); add in anywhere from $100,000 to $300,000 for college expenses per child (so, two kids at $300k = $600k); finally, add in ~$50k for burial expenses. Whatever that number comes out to is the face amount you should probably apply for. Round it to the closest $100,000 (it doesn’t need to be exact to the penny).

You can check all these numbers at Select Quote or Policy Genius. If possible, pay the premiums annually (even if it is kind of a big number) as you’ll probably save somewhere between 10-20% off the premium.

Last word here: it’s prudent to get your own policy on top of any coverage you may have through your employer. Most employer-sponsored life insurance policies don’t go with you if you change jobs, so if you quit or get laid off, your policy coverage ends with your employment. The risk here is if your insurability changes (meaning your health takes a turn for the worse), then you could be stuck paying a bunch more for the same coverage. Conversely, if you buy your own policy now and then your health degrades, your rates won’t change.

Funding Educational Expenses

The go-to recommendation is to open a 529 plan. That’s what my wife and I did for both of our kids (shoutout to Grandpa Mike for getting us started). The other option is something called a Uniform Transfer to Minors Act (UTMA or UGMA, depending on your state) brokerage account. We considered a UTMA but decided the 529 was the right way to go (shout to Cole for helping us think through it).

Here’s why we went with the 529:

• Taxes: Contributions to a 529 plan are not deductible on federal taxes, but some states offer tax deductions or credits for contributions. If you live in a state with high income taxes like California, New York, Oregon, or New Jersey, then every little bit helps.

• Investments made in a 529 grow like a Roth IRA: so earnings are tax-free and withdrawals for qualified education expenses are tax-free at the federal level. “Qualified education expenses” is very broad: it includes books, room and board, supplies like laptops, and more.

• Financial aid benefit: the parents own the 529 for the benefit of their child. Meaning that when the kid fills out the FAFSA, the money in their 529 doesn’t count as their property. With a smaller asset pool to their name, the kid stands a better chance at qualifying for federal financial aid. That’s not the case with UT/GMA, which is owned by the child and managed by the parent.

Other benefits include that you can use 529 assets for any educational expense. That includes private elementary tuition, private high school tuition, trade school, coding school, Mars flight camp (my first kid will be 15 in 2036… who knows where we’ll be at), whatever. If it charges a tuition, you can probably use the 529 to pay for it. You can also change the beneficiary. So, if my first kid doesn’t end up using it, we can change it to our second kid or even ourselves. You don’t have as much flexibility with the UT/GMA.

So what’s the downside?

The investment options suck. Most funds available for investment are vanilla stocks and bond funds that usually underperform the market and charge active fees. Its my biggest issue with 529s. You’re hoping that your kid doesn’t need the money when the market is in the middle of crashing because none of the funds in most 529 investment menus are built to avoid big market drawdowns.¹

Investment options aside, the benefits of a 529 pencils out to be the right move.

Beneficiaries

Time to add your kids as beneficiaries on the stuff you own! What does this mean?

When you open an investment account or take out an insurance policy, the issuing company makes you complete the beneficiary form, which is a legal form that tells the company where to send the money if you die.

In general, the order of your beneficiaries should be:

1. Your spouse if they are alive and mentally competent

2. Your parents if they are alive and mentally competent

3. Your children at 100% if you have one, or split evenly if you have two or more

Why your folks ahead of your kids? Well, if you and your spouse both die and your kids are under 18 (or, more accurately, the age of majority, depending on the state you live)², the state will appoint a guardian or conservator to manage the assets for the benefit of your minor children. The guardian or conservator would be responsible for managing and preserving the assets until your children reach the age of majority.

So, we assume you prefer your folks to step in ahead of a state-appointed party.

The way to avoid all of this is to pay a lawyer to write you up a trust. A trust is a legal arrangement that allows individuals to protect and manage their assets during their lifetime and provide for the orderly transfer of those assets to beneficiaries after their death. Trusts are commonly used in estate planning because they offer flexibility, control, and various benefits over other estate planning tools like wills.

So, instead of listing your parents or your spouse, you list the trust as your primary beneficiary because it already contains instructions on how to manage your assets in the event of your death. It will run you between $1,000 to $3,000+, depending on the complexity of your situation.

What’s the Upside?

Normally, we tell you to do less and post that GIF of Paul Rudd. This time, we’re saying go take care of this. While none of these are particularly fun tasks, they are important steps to take to protect your family and plan ahead.

What’s the upside, then? You only have to do them once and them review every few years or when you have another kid. But that’s easy. Do the hard bit now and get ‘er done.

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For Your Weekend

Read:

BuzzFeed, Gawker, and the Casualties of the Traffic Wars by Nathan Heller ($ The New Yorker)

Ben Smith's new book, "Traffic" explores the rise of online traffic-chasing as a norm in modern media. Smith, the former editor-in-chief of BuzzFeed News, delves into the transformation of media influenced by social media's viral nature and its impact on traditional power structures. The article highlights the publication of the Steele dossier by BuzzFeed News as an example of traffic-chasing, driven by the desire for online engagement. It also touches on how traffic-focused journalism contributed to the growth of the MAGA movement and the influence of platforms like Facebook. The piece reflects on the changing landscape of journalism and the challenges faced by media organizations in the age of web traffic.

Play

Star Wars Jedi: Survivor Has Perfected Lightsaber Combat by Matt Purslow (IGN)

"Star Wars Jedi: Survivor" has the best lightsabers in any Star Wars video game to date. The combat has a pitch-perfect hum, crackle, and hiss, combined with swift and smooth fight maneuvers that convey the weapon's prowess. The combat mechanics in "Jedi: Survivor" are likened to FromSoftware's "Sekiro," with a strong emphasis on parrying blows and creating a spectacle of choreographed duels. The game introduces different stances and lightsaber types that cater to different fighting styles, reminiscent of the approach in the "Jedi Knight" series. Plus, dismemberment! A Star Wars hallmark!

Chuckle

1. Nerd alert: I just want like a basic long/flat trend-following stock fund. Keep me in the market, avoid the big drawdowns. Is that so much to ask?

2. Or, more technically, the “age of majority,” which is 18 for most states but not every, because of course.