Covering Their Bases: Insurance and Education

Juan and Ester Hernandez expected to get financial advice when they participated in a Money Make-Over last April, and they did. But they also got a nice dividend later: peace of mind.

Juan, 37, an assistant supervisor in the tool-and-die department of a Cerritos furniture manufacturer, and his wife, Ester, 40, who has recently returned to work, were looking for pointers on investing so they could, among other things, help their four children through college and fund a comfortable retirement.

After speaking with fee-only financial planner Ed O’Hara of Silver Spring, Md., they decided that addressing their insurance needs should be their first priority.

At the time, their only source of income was the pay from Juan’s job, about $49,000 in annual salary plus several thousand dollars in overtime. Their emergency provisions were $5,000 in a money market account, roughly $5,000 kept in a checking account, $10,000 in a certificate of deposit and term life insurance policies of $25,000 each on themselves.

O’Hara told them those provisions were fine for a short-term emergency but that any extended problem could wipe the family out.

So, assuming that Ester would be in a job that paid her at least $20,000 a year, O’Hara calculated that a $200,000 15-year term policy on Juan would be sufficient to meet the couple’s needs and affordable. With the higher death benefit, Ester would be able to pay the mortgage on their Pico Rivera home, keep up with other bills and help get the kids through college.

Juan and Ester took that advice, buying a $200,000 20-year term policy on Juan with premiums of $37 a month.

The other important step in building their financial safety net was to get disability insurance. O’Hara stressed the importance of this coverage for the family too, in case Juan should suffer a serious illness or injury that would keep him out of a job for a long time.

Juan’s employer has since begun offering disability coverage for employees, Juan said. He pays about $12 a week for coverage that, he says, would provide him with 66% of his salary for as long as he is disabled until age 65.

“Now we know we are going to be able to live if something were to happen to me,” Juan said. “It is more relaxing to know something is there for us.”

None of this is to say that the couple have lost sight of their longer-term goals. “We definitely want to do something for our children’s education,” Juan said.

To that end, the Hernandezes will be opening Education IRA accounts this year for Javier, 14, Julia, 12, Ana Carolina, 9, and Inez, 7.

The couple will fund the accounts, as O’Hara suggested, with the $400-per-child tax credit they will take for the 1998 tax year. Investments in Education IRAs grow untaxed and, as long as the money is used to pay for education, withdrawals are not taxed either.

However, it looks as if there might be a college student in the family before Javier finishes high school. Ester, who has a two-year college degree and is working part time as a teacher’s aide, is thinking about getting a four-year degree and teaching certification.

As for Juan’s 401(k) retirement savings, O’Hara had wanted to see Juan become more aggressive, putting it all in three U.S. growth-stock funds rather than spread across nine categories that include bonds, international stocks and a money-market fund.

O’Hara said Juan needed to do what he could to maximize his retirement savings and that he is young enough to take more risks. O’Hara further argued that investors don’t need an international component in their portfolios as that strategy has not paid off since the mid-’80s.

With the stock market’s recent fluctuations, Juan has decided he’d rather leave his 401(k) allocations alone. But that doesn’t mean he won’t make changes in the future, he said.