STAY ON YOUR PARENTS’CAR INSURANCE?
When a young driver gets their first license, in the vast majority of cases, the best financial option is to put them on their parents’ car insurance. Indeed, some insurance companies will mandate that this happens.
However, as housing costs increase, more and more young people are remaining at home rather than moving into their own housing.
According to the Pew Research Center, one-third of all 25-29-year-olds lived with either their parents or grandparents.
By comparison, in 1970, one in eight 25-29-year-olds lived with their parents. This is having a number of effects when it comes to things like car insurance.
Having an adult child living at home raises the question of whether it’s better to keep them on their parents’ car insurance, or whether it’s better to have a separate policy. This guide will examine the financial pros and cons and outline the best option for all parties.
UPPER AGE LIMIT
The most important fact when it comes to children on their parents’ car insurance is that there is no upper limit. Unlike health insurance, which has a 26 cut off, a child can stay on their parents’ car insurance for as long as they want, as long as they meet the other criteria for eligibility. However, there are often related factors when it comes to age.
CAR INSURANCE COSTS DROP WITH AGE
Putting a teen driver on their parents’ car insurance is a financial no-brainer. The costs of insuring a teen are often extremely great, owing to the (relative) frequency with which they require a payout. However, as the young driver gets older, the cost of insuring them drops rapidly.
Average per year Insurance Rate ( $ )
As the table (above) shows, the cost of insuring a driver drops rapidly after they hit 25. Of course, this will vary depending on other factors, although it may be the case that when a child hits a certain age, adding the cost of their own insurance to your insurance is more expensive than having two different insurance policies.
You will need to crunch the numbers for your own individual circumstances, although as a general rule, the older the child, the more viable it will be to have them on their own insurance.
GENDER IS A FACTOR
Along with age, gender plays a role in insurance costs. Young female drivers require fewer claims than young men, and, as a result, their insurance premiums are lower.
THIS VARIES BY AGE, AS THE TABLE BELOW SHOWS
Average per year premium for a male driver ($)
Average per year premium for a female driver ($)
Again, gender is a key metric that will feed into the cost of your car insurance calculations, although the cheaper the person is to insure, the more feasible it will be to have them on their own insurance.
LIVING IN THE SAME HOME
Aside from any of the financial considerations, you also need to examine the legal aspects of your decision.
For example, most insurance companies will require that you list all licensed household members on your car insurance policy, including your child.
The insurance company assumes that if you live in the same home, you are likely to use the same vehicles, and therefore it is compulsory for all residents to be listed on the same insurance policy.
IF A CHILD MOVES AWAY
A key issue comes if a child moves away from home. Although it may seem like that’s the time for them to get their own insurance policy, it may make financial sense for them to stay on yours.
Insurance companies have slightly different criteria when they allow children who do not live at home to be listed on the policy.
You should be sure to check your contract and/or speak with a representative on the phone.
Some insurance companies have a threshold for ‘financial independence’ – once a child reaches the level of financial independence, they no longer allow for them to be on their parent’s insurance.
How they define ‘financial independence’ does differ from company to company, although what they have in common is that they usually see the following two as a threshold for financial independence.
OWNING A HOME
If your child owns their own home or apartment, then an insurance company will consider them to be financially independent, and will no longer allow them to be on your insurance.
If they rent an apartment of their own, they have not yet met the threshold for financial independence. Similarly, if the home that they own is in your name, then you will still be able to have them on your own insurance.
If your child gets married, then regardless of their financial position, they are usually considered to be independent financially.
Under some circumstances, such as if they are still teenagers or still live in the home with their parents, the insurance company may not consider marriage to be a threshold (although you may need to put the spouse on your insurance).
So, first you should check whether your child could be on your insurance; the next step is to determine whether they should be on your insurance.
There are some very clear benefits for a child to stay on their parents’ insurance, although you will need to weigh these against your own specific circumstances.
CHEAPER FOR THE CHILD
Without a doubt, being on a parents’ car insurance will be cheaper for the child (and not only because the parent will usually pay for the premium!). For teen drivers, who are extremely expensive to insure, being on the parents’ insurance will decrease costs dramatically.
Effectively, by sharing insurance, the insurance company will assume that you, the insured, assume some of the risk and responsibility of your teen driver, who is likely to be using the car infrequently, so will adjust prices accordingly.
They essentially take a mean of the risk of the parent and the risk of the teen driver. Of course, this means that the parents’ premiums will increase, although, for the teen driver, this is often the only option that will be affordable.
ESTABLISH INSURANCE HISTORY
Much like credit, insurance companies look for a solid history of insurance when offering a policy. Having a child on a parent’s insurance fulfills this stipulation, and effectively allows the child to build up their own insurance history, thus reducing their premiums in the future.
CHILDREN WITH THEIR OWN CARS
If your child gets his or her own car and is still living at home you will have a financial decision to make. In this instance, you can choose whether to have the child on their own insurance or to keep them on yours.
SOME OF THE FACTORS YOU WILL NEED TO CONSIDER (AND YOUR INSURANCE COMPANY WILL CERTAINLY CONSIDER):
What car your child buys (a cheaper car will be cheaper to insure, a sports car more expensive).
Your child’s driving history.
The deductible (the higher the deductible, the cheaper the premium).
Your child’s age, as some insurance companies will not allow a minor to have his or her own policy.
Before thinking about buying a car for your child, price up insurance options. In general, the sweet spot for insurance is the combination of safety and price.
Buying an older, cheaper vehicle may save money, but an insurance company will (rightly) see it as less safe. A modern SUV will be safer but will cost much more.
WHEN IT’S BEST TO GO IT ALONE
Although it varies greatly from family to family, there are certain times when it is certainly better for a parent to cut their child off from their insurance.
Or, to put it another way, there are certain times when not having your child on your insurance is definitely going to be cheaper. There are two main examples:
POOR ACCIDENT HISTORY
If your child has a poor accident history then your insurance company may not allow them on your insurance or may refuse your policy application. In these instances, you have little choice but to get a separate insurance policy for your child.
However, this is likely to be expensive for your child, who will not be able to pool their driving history with yours to see a reduction.
IN THESE CIRCUMSTANCES, YOU CAN INVESTIGATE ONE OF THE FOLLOWING OPTIONS FOR YOUR CHILD:
- Advanced driving lessons
- Certified course for driving
Both of these will help to make them a more attractive prospect for insurers.
If your child has a DUI then you are certainly legitimated in removing them from your insurance. Although it may have been a one-off incident, your insurance company will see them as a major risk, particularly if they are a teen driver.
Teen driver insurance rates for DUIs are more than double those of non-DUI teens, meaning you will be looking at a premium of roughly $4,000 (depending on your state etc.). Your child may also have a short-term revocation of their license.
Even when the license is returned, a DUI can see insurance remaining high for a period of 10 years, so it might be the right time to tell your child to get their own insurance.
SCHOOL AND COLLEGE DISCOUNTS
A gray area for parents and children is when children go off to college. They have their own address but, for all intents and purposes, they still reside with their parents. In these situations, insurance companies have a couple of options that can help you save money.
COLLEGE STUDENT DISCOUNT
If your child is at a college more than 100 miles away from your home but wants to retain access to your car during vacations, most insurance companies will cover that.
The usual discount in these circumstances is around 50% because the company recognizes that the child will be unlikely to drive as often as when they lived at home.
GOOD STUDENT DISCOUNT
Most insurance companies also have a discount for students who can maintain a GPA above 3.0. Students with stronger grade performance are less likely to crash, and therefore less likely to require an insurance payout.
SPEAK TO A BROKER
As this guide has shown, there is a wide range of options available, and it can be confusing to know which one is the best for you and your family.
The best course of action is to get as much information as possible and try as many permutations as you can.
Cost is only one factor – you will also need to take into account what are the safest options for your family. Although searching online can give you a quick view of the prices and options available, by far the best choice is to visit an independent broker.
He or she will be able to talk through your options, as well as make suggestions you may not have considered. They will also be able to make recommendations on good companies to work with and will be able to guide you through the whole process.
As children are staying at home longer than ever, parents are increasingly having to decide on what are the best financial options for their children long into their adulthood. With 33% of 25-29-year-olds now living at home (and the trend looking set to continue for the foreseeable future) children are delaying the point of their financial independence.
When it comes to having children on parents’ insurance, the options are far greater than they may initially seem. The absence of an upper age limit gives greater flexibility to parents, meaning that it is much more a financial decision than a logistical one.
Licensed Insurance AgentCynthia Lanctot