Makeover: Funding Insurance, College
April 1 -- Jonathan and Kristi are completely out of debt (except for their mortgage) and are now looking to save and invest for retirement, college for their one-year-old boy and purchase life insurance.
They have no experience with investing and are a little confused about how much life insurance they need and what type of life insurance to buy.
Jonathan, you and Kristi are on the right track. You seem to be a very financially responsible couple. Before you do anything, I would counsel you to establish an emergency fund that will provide you with about three to six months of living expenses.
Once you have established your emergency fund, you can then begin funding your 403(b) and 401(k) plans for retirement. If there is an employer matching provision in these plans, try to max out your contributions so that you at least get the maximum matching contribution. If you still have excess funds by all means contribute to a Roth IRA too.
Saving for College
You can also begin saving for college by contributing to the new 529 college saving plans.
The recently enacted Economic Growth and Tax Reconciliation Act of 2001 made earnings of qualified withdrawals from state-sponsored Section 529 plans exempt from federal income tax, and also raised the annual contribution limit. So, these plans are attracting lots of attention as a tax-free savings vehicle for college.
The Georgia 529 Plan managed by TIAA-CREF is still in the development stages but should be established some time this year.
Insuring the Future
On the life insurance question, you should consider pure insurance (term insurance). At your age it will give you the most insurance for the least amount of premium. All of the other types of insurance have some sort of investing feature, which you don't need.
The purpose of insurance is to provide for those who are currently dependent on your income and who will be dependent on your income in the future. Your one-year-old son and your wife would be the folks who will benefit from this insurance coverage. Since Kristi is also employed you may be dependent on her income too. So both of you may be candidates for term life insurance.
