Life Insurance

Preparing for the Cost of Raising a Child

mother holding child
Having a baby is an exciting time in life, but starting a family can be financially intimidating. According to a survey by the U.S. Bureau of Labor Statistics, the cost of raising a child is nearly $13,000 a year in a middle-income, two-parent household.

That number is undoubtedly rising with inflation. In 2021, the cost of living increased by 6.8%, one of the biggest jumps since the early 1980s. It goes without saying that food, housing, transportation, and other costs will increase each year. Luckily, some extra foresight and planning can help you prepare for parenthood without a ton of extra stress.

Here's how to prepare for the average cost of raising a child in the U.S. 

Labor and delivery or adoption: the average costs of having a baby

One of the first questions you're likely to consider is, "How much does it cost to have a baby?" In reality, costs can vary significantly, depending on whether you're birthing a baby or adopting, plus what kind of health insurance coverage you have. 

A hospital birth for a mother with health insurance averages around $4,500 out-of-pocket in the U.S., although that number can increase for C-sections and other complications.

Adoption comes with a much higher cost, especially through a private agency, which averages around $70,000. This includes agency fees, legal fees, as well as potential medical and living expenses for the birth mother and baby. 

Health insurance

Once you have your baby, you'll likely need to upgrade your health insurance plan to provide additional coverage for your new family member. Expect your monthly premium and deductible to increase with more members on the plan. 

The good news is that you can usually qualify for special enrollment with the birth of a child. Whether you get health insurance through your employer or the federal marketplace, you should be able to update your plan at any time of year — not just the standard year-end open enrollment period.

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Raising a baby takes a village. Consider preparing early on for childcare. If both parents are working, you may need to choose a daycare facility that works with your schedule or budget. The average cost per child is over $8,300 a year. 

Alternatively, perhaps you have a family member who can help with childcare. But you may still need to factor in extra transportation costs and any other relevant expenses. Finally, if one parent decides to stay home and care for the child, be sure to account for those changes in income and benefits.

Tax credits

One thing to factor into the annual cost of raising a child is tax benefits. Once you have children, you may receive a few potential federal tax credits. These typically have income limits, so eligibility depends on how much you earn each year.

  • Child tax credit: The standard annual credit is $2,000 per child under 17 years old. In 2021, the American Rescue Plan Act temporarily expanded the benefits to $3,000 per child under 18 years old and $3,600 per child under 6. However, as of January 2022, Congress has yet to extend those benefits for the 2022 tax year.
  • Childcare credit: You can reduce your tax liability using some of your eligible daycare expenses for kids 13 and under, including pre-school, summer camps, and after-school care. This benefit allows you to receive a credit of up to 35% of expenses, not to exceed $3,000 for one child or $6,000 for multiple kids. 
  • Earned Income Tax Credit: The EITC is an income-based credit. You must earn less than the maximum amount based on the size of your family and tax filing status. The more people in your family, the higher the qualifying income you may have. 

Understanding your eligibility for child-related tax credits can make a huge difference in the cost of raising a child per year.

College savings

If you plan to help your child pay for college, it's generally best to start saving as early as possible. For the 2019-2020 school year, the average in-state tuition, room, and board cost over $22,000 — and that's just for one year. If you want to send one or more kids to a four-year school, it takes some planning. 

Use a college savings calculator based on each child's age to understand how much you should plan to save to cover anticipated costs. Consider a 529 college savings plan to take advantage of tax benefits. While contributions are taxed, investment withdrawals are tax-free when used for eligible expenses.

Life insurance

Being financially responsible for a child means that both parents may want life insurance to help provide for their kids in the event one or both of you unexpectedly pass away. Term life insurance for families can help to see that debt, lost income, and/or final expenses are covered. 

You can even include enough coverage to help pay for your children's college tuition. A life insurance calculator is a great way to figure out the best policy for your growing family. And the monthly premiums are often quite low for young parents looking for coverage until their kids reach adulthood.

Bottom line

The cost of raising a kid isn't tiny, but the everyday joy that comes with parenthood is worth those extra dollars. Prepare your finances as far in advance as you can to avoid surprises. 

Also, explore different online life insurance policies in the event the unthinkable occurs. 

That way, you always have the peace of mind that your children are financially protected, no matter what happens.

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