Family Planning
Our Expert
Thomas A. Haunty
Thomas A. Haunty, CFP, REBC, is a senior associate with the North Star Resource Group in Madison, Wis. He has provided financial assistance to lawyers and their clients since 1982.
VITAL STATISTICS
Deanne Medina
POSITION Partner at Maduff, Medina & Maduff in Chicago
AGE 38
GOAL To establish a foundation for her family’s future
The last two years of Deanne Medina’s life have been nothing short of a whirlwind. Her first child was born prematurely and then diagnosed with Down’s Syndrome. Nine lifesaving surgeries followed, and daughter Mila, now 2, is finally stable. But Medina’s finances are on anything but solid ground.
After Mila was born, Medina cut back her work schedule significantly to care for her child, greatly reducing her income. Medical expenses also whittled down her once substantial savings.
Though Medina recently returned to work four days a week–providing some much needed additional income–the newfound financial stability also has brought an unwelcome revelation: She and her husband are behind when it comes to saving for the family’s future.
With no more surgeries or risky medical procedures to distract the couple, Medina realizes that they need some kind of financial plan. “Our child will outlive us. I am concerned about how she and any other children we may have will be taken care of if something happens to us, and especially if something happens to my husband because his income is twice mine,” she says.
Medina characterizes herself as fairly risk and debt averse. Through all of the turmoil in their lives, Medina and her husband still managed to pay off credit card debt and even started a 529 college savings plan. But she is confused by her options and about how to make the best use of their money.
She feels they should be investing their money to make it work for them, but she wants to keep a substantial amount liquid to cover expenses for their daughter’s special needs. They also have done no estate planning.
Have Enough Insurance?
Life audit financial expert Thomas A. Haunty says Medina’s situation is not all that uncommon. “It’s the classic case where the cobbler’s kids have holes in their shoes,” he says. “Lawyers know better and yet do not implement for themselves.”
Haunty says Medina can create the financial security she desires for her family by building a solid financial foundation with proper estate planning tools and life insurance. Her daughter’s special needs just add a twist to the planning.
Having adequate life insurance is the cornerstone of the foundation that Haunty wants the Medinas to build. “It is almost impossible to save enough to replace a deceased spouse’s income and save for their child’s future,” he says. “Their child will outlive them. Life insurance not only provides for the surviving spouse and their child today if something happens, it also addresses their child’s future expenses when they both pass on.”
Currently, Medina and her husband each have policies that only replace about one year’s family income. Haunty says that coverage level is insufficient. Because the survivors will actually be losing the deceased’s entire future income, Haunty wants the Medinas to purchase the most coverage they can buy.
Most insurance companies will sell policies that are 25 times to 30 times the amount of the insured’s income. To make the premiums affordable on such high amounts, Haunty wants the Medinas to buy a convertible term policy that can later be converted to permanent or whole life insurance. “At least 10 year, 20 year or 30 year level term insurance can be very affordable for now, and they can convert to more permanent coverage, which will last long enough to leave a legacy for their daughter’s future needs.”
Too many parents, Haunty says, sacrifice saving for their own retirement because they’re saving for their special needs child instead. But that child’s future needs could be better addressed by maintaining permanent life insurance. With adequate life insurance in place, the Medinas can save more aggressively for retirement as well as rebuild their savings accounts.
Medina’s husband has a 401(k) retirement account through work. Haunty wants him to keep up his current levels of funding it and, if future cash flow permits, to increase his contributions. Regular contributions are a first step in building retirement security for the couple, he says.
Medina’s own firm does not offer a retirement benefit, but that does not mean she can ignore planning for herself. Haunty wants her to invest in a mutual fund and start funding it by trickling a small amount each month–even if it’s just $50–into the account. Because the account is a mutual fund, it can be quickly liquidated if cash is needed. This plan also allows the Medinas to rebuild the cash reserves they like to keep on hand. When they have replenished their savings account to an amount at which they are comfortable, Haunty says they can invest any extra cash each month into their retirement accounts or use it to save for other goals, like a new house or car.
With their financial house in order, Haunty says the Medinas also must see an estate planning attorney to get an estate plan in order. Haunty knows the temptation is great for attorneys to create these documents themselves, but because of their daughter, they need specialized advice.
In addition to getting wills and powers of attorney for health care and financial matters, Haunty wants them to have a special needs trust set up for Mila so that future inheritances or wealth transfers do not disqualify her from receiving government benefits. An estate planning lawyer also can advise the Medinas about available tools that will maximize distributions to their children and minimize any potential tax liability. Haunty says the Medinas must regularly update their estate plan to reflect current needs and finances. Finally, he tells Medina to give herself a break. Life will sometimes throw you a twist, and just getting back on track is to be commended. “Sometimes just maintaining so that you are not going backwards is OK,” he says.
Life Audit Hot Tip: Consider the Guardian
You may have found the perfect person to be your children’s guardian, but is that person financially able to take on the responsibility? Consider making the guardian a full or partial beneficiary of your life insurance policy so that person can have money to get his or her own financial house in order while raising your kids. Haunty says: “Think about what you really want: You want your kids to be raised well. What’s a children’s trust with a million bucks in it just for your kids if their guardian is struggling?”
Sidebar
A Parent’s Financial Planning Checklist
Life Insurance: Buy the most you can afford. A good rule of thumb is 20 to 30 times your income. If permanent life insurance is too expensive, buy a convertible term policy to start.
Retirement Planning: Continue contributing to work sponsored retirement plans. Consider investing small amounts of money each month into a mutual fund and increasing the contributions as income levels permit.
Savings: Use leftover money each month to rebuild emergency reserve savings. Once the desired level is reached, start another account to save for other goals.
Estate Planning: Engage the professional services of an estate planning lawyer. Both parents need wills, powers of attorney for finances and health care, and the appointment of a guardian. Ask about estate planning strategies for special needs children, special requests or special circumstances.
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