S4-19: Term vs Whole Life Insurance, 529 Plans & Should My Parents Use an Advisor

Meghan, also known as the Family Finance Mom, held a live Q&A session on Valentine's Day. She addressed questions about disability insurance and term life insurance, especially for those with kids. She explained the concept of insurance as a financial product, where individuals pay a monthly premium to an insurance provider, and in the event of an emergency, the provider covers the cost. Meghan discussed the concept of insurance, emphasizing that it's about transferring financial risk to another entity in exchange for a small monthly premium.

She explained how disability insurance works, noting that it's typically short-term and can be obtained via employer benefits or added on by individuals. Meghan also highlighted the importance of term life insurance vs whole life, describing term life insurance as a cost-effective way to provide financial security for a specified period. She also advised checking the credit rating of insurance underwriters and comparing premiums before choosing an insurance provider.

Related Post: The Importance of Life Insurance for Parents: Why It's Essential

Meghan discussed the considerations involved in deciding whether to pay a management fee for a financial advisor. She noted that while fees can accumulate significantly over time, the can be worthwhile, particularly if the alternative is not investing at all. She emphasized that a financial advisor's role, particularly once you reach retirement and the asset accumulation phase, extends beyond just managing investments, including ensuring payouts cover living expenses, filing taxes, and minimizing taxes. Meghan cautioned against quickly dismissing a financial advisor without fully understanding the services received and potential alternatives. She suggested having a discussion with parents about their current services, costs, and comfort level with self-management before making any decisions.

Meghan discussed the potential value of obtaining a CFP certification for a career in personal finance. She noted that it is often the gold standard for financial planners and can increase the chances of being hired in that role. However, for those interested in becoming financial advisors, a CFP certification might not be as beneficial, as they may need to explore other exams and accreditations.

Meghan stressed the importance of understanding the specific services and roles one wants to provide before investing in certifications. She also pointed out that many financial certifications includ work experience requirements and have associated costs, urging careful consideration and research before committing to a certification path.

Meghan discussed the tax incentives of 529 college savings plans, emphasizing that contributions are made after tax, allowing for tax-deferred investment gains and tax-free withdrawals for qualified educational expenses. She clarified that these funds can be used anywhere and don't lose their value if unused for educational purposes, but withdrawals for other reasons would be subject to tax.

She also touched on the ability to roll over unused funds to a child's IRA starting in 2024. Meghan then explained the choice of which 529 plan to use, noting that it doesn't have to be in the state of residence or school. She encouraged using the state plan if state income taxes are applicable, as contributions may be tax-deductible on state income taxes in some states. Meghan also discussed the investment options offered in these plans.

Related Post: Are You Worried About How to Pay for Your Kid's College?

Is it better to contribute more to my 401K or Roth?

A question was raised about the relative benefits of contributing to a 401k versus a post-tax account, which Meghan responded to by explaining the debate between immediate tax benefits versus potential future tax savings.

Meghan discussed the latest updates on Q4 earnings and market trends, highlighting slightly above-average earnings for 2023 but slow growth. She noted that many companies have issued negative guidance for Q1 and 2024, leading to high valuation ratios, 25% higher than the long-term average, due to a market rally fueled by hopes of rate cuts. She also discussed the impact of the tech-heavy market on the overall average valuation.

Meghan also touched on economic and financial data, including inflation reports and Valentine's Day spending projections. She pointed out that inflation was decreasing more slowly than expected, and Valentine's Day spending was projected to dip slightly, indicating potential consumer weakness.

She also discussed the impact of high housing prices due to a shortage and suggested that new construction could help alleviate the issue. Meghan also mentioned the recent increase in gas prices, attributing the rise to seasonal factors and noting that prices typically start to increase around mid-February. She committed to sharing more information on these topics through her social media and podcast channels.