This Week in Your Wallet: Baby Season, The Golden Compromise & Why You’re Paying More For Life Insurance
My mother always said if she and my father had waited until they could afford to have children, my brothers and I would never have been born. I suppose that’s why I’m drawn to stories like the recent Wall Street Journal piece entitled “Can You Really Afford a New Child?”
It is baby season, after all. The piece notes more babies are born each year in August than any other month (my son, Jake, being one of them), and that a child is likely to cost about a quarter million to raise – not including the cost of college. Children with disabilities can cost five to 10 times that much.
As with any other life transition – marriage, retirement, starting a new business – approaching parenthood with a financial plan in mind can eliminate some of the stress that comes along for the ride. The story suggests increasing the size of your emergency fund from three to six months to substantially more. (If you’re planning on one spouse leaving the workforce after the birth, one way to do this is to practice living on a single income during the pregnancy and bank the rest. That trial run will also show you if you can actually do it.)
It also delves into the need for life insurance. Increasing the number of people depending on your income naturally raises the need for coverage should something happen to you. Generally, you’re best off starting with term insurance – the only way most new parents can buy as much coverage as they actually need. But, as I noted in my column for Fortune.com this week, recent changes in the curve of life mean that you may need that insurance for a longer period than you actually expect.
The fact that we’re having kids later – and that they’re in the family nest longer – means that even when your 20- or 30- year term expires, you may still need coverage. How should you deal with that scenario? Converting all or part of your policy to permanent insurance is one possibility. Replacing a 20- or 30- year level term policy with another halfway through your first time is another. If this sounds like an experience headed your way, check out the full piece here. And if you’re expecting a bundle of joy in the heat of summer, congratulations!!
And now for the rest of the news of the week…
Paying the premium
On the topic of life insurance, know that your gender, age and smoking habits can affect your premium price. InsuranceQuotes.com recently surveyed prices for the top 25 carriers in the country, finding that men pay an average of 38% more than women for the same coverage, smokers pay a whopping 235% more than non-smokers and that 45-year-olds can pay up to 120% more than 35-year-olds. When it comes to gender, women have the financial edge, because they’re not as risky to insure. As CNNMoney reports, men are more likely to get cardiovascular disease, certain cancers and have accidental injuries that make them more of a gamble to insurers. Not to mention, their average life expectancy is shorter by roughly five years, which means an insurance company is more likely to pay out a man’s policy than a woman’s.
The smoking one is a no-brainer. In fact, kicking the habit is Money Rule #82 for me. When you factor in the (higher) cost of life insurance, the price of cigarettes comes out to $150 a pack. Therefore, quitting isn’t just smart for your health, but for your wallet too. And finally, age has always played a significant role in pricing. For example, a 35-year-old will pay 27% more than a 25-year-old for the same coverage – and this gap continues to grow over time (i.e. 45-year-olds pay more than twice as much as 35-year-olds, which can be 120% more). Which means if you know you want (or, ahem, need) to lock into a level-premium term insurance policy, sooner is better than later.
The golden compromise
For career-oriented couples, sometimes retirement planning isn’t as much, when can we afford to retire, as it is, when are we willing to retire? And if each spouse has a different answer, it can get pretty tricky. USA TODAY covered the issue last week, reporting that the majority of retirement timing conflicts arise when one partner is forced to leave a job (i.e. firing, layoff or downsizing), and that partner then wants the working partner to retire, too. So, what do you do when you and your spouse disagree on when to enter the golden years? The experts say: compromise. As always, that’s a lot easier said than done.
For starters, if you haven’t had the conversation with your spouse about what retirement looks like in your head, now’s the time. Get it going by sharing your retirement visions and dreams. Factor in the finances, of course, but really get into the details including where you’ll live and when you’d like to start. (A survey from Bank of America Merrill Lynch found that only 41% of couples ages 50 and older have talked about where they’ll live in retirement.) It’s easy for couples to get locked in power struggles when each spouse feels entitled to what they want. But by practicing a little empathy training (taking turns talking and listening to each other’s needs, feelings, etc.), psychologists say your better understanding of each other will lead to more supportive attitudes – and then – compromise. To see how a few couples successfully compromised by practicing the above, head here.
The power of perspective
New research says greater financial knowledge doesn’t necessarily mean better financial behavior. And for those of us in the business of financial education (yes, like me), this isn’t research you like to hear. Though Carl Richards (as he generally does) puts the research into perspective. He reported for The New York Times recently that one key factor has to do with your perspective on time.
People stuck in the past are more likely to be conservative and take less risk. People living for today tend to do, well, just that. They take fewer steps toward providing for themselves tomorrow. People focused on the future are in the best boat. They’re inclined to become more financially literate – which is promising – although these folks also have a habit of looking for investments that are too good to actually exist. So, how can we use this research to our advantage? In Richards’ words:
“Knowledge alone isn’t enough…However, as this study suggests, by recognizing the impact our time perspective may have, we stand a greater chance of turning that knowledge into good behavior…I don’t believe it’s about not living in the past, avoiding the present, or rarely looking into the future. My takeaway is that we need to do a better job of testing whether our time perspective is blinding us to acting on our knowledge. It comes down to improving our awareness of how we’re applying the knowledge we do possess.”
Have a great week,
Jean
