By Amanda Thomas, MS, CFP®, CDFA™
Relative to 30 years ago, young adults are taking longer to complete school and begin careers. Many parents have children who are in college, or out of college and not yet independent as a result of the changing labor market. Surveys tracking young people through their first decade of adulthood have found that 40% of young adults are still receiving some form of financial assistance. It's also not unusual for parents to continue to cover adult children under their auto insurance policies, and their employer’s health insurance plans, and even have a credit card issued to their child under their record.
All of this can help the child temporarily until they can get a job, establish their own credit, and be self-supporting. However, there are steps the parents can take to get the child “launched” quicker and ease their transition.
- Covering a child under your auto policy may save money, but as the child gets out on their own, they should absolutely get a policy in their own name. Having been under the parents' coverage gives the child some auto history with the insurance company, but the child needs to establish their own history. Having longevity with the insurance provider can help when they file a claim and if there is a longer history, the insurance company may not readily drop them as a customer.
- Also note that if the child is under their parents' auto policy, then they are most likely under the parents’ umbrella policy as well. So, if the child has an accident and the injured files a claim beyond the limits of the auto policy, the parents' umbrella will kick in. While this offers the child some protection, it can compromise the parents’ coverage and could cause them to be dropped by their insurance company after the claim. Instead, if the child has their own policy, anyone making a claim against them is limited to the child’s auto policy limit, and if the damages exceed that, the child’s limited assets are the only thing at risk.
Applying for Health Care
- Covering a child under a parent's health insurance may be the most cost-efficient way to pay for it, but if that cost is too high or the child reaches the age of 26, consider having the child apply for their own policy, either through the Affordable Care Act, which can allow them to get a government subsidy, or via Medicaid if they are in school or living on their own, but have nominal income. Once a child turns 18, then the parents no longer have certain oversight rights. It is important for an adult child to have a health care directive in case something happens and a proper legal document to provide Authority for those who can make medical decisions on their behalf. If you are a California resident, Anthem Blue Cross is recommended.
- Lastly, help the child get a credit card on their own, while they are in college. Credit card issuers sometimes make an exception for students who may not have an extensive credit history. The child then starts to use their own card and over time will build up a longer credit history and can ask for increases in the available credit.
Transitioning into adulthood can be a stressful time for young people, and these days it is getting much more difficult. Taking the steps we delineated can lay the groundwork for them to begin their new life as an independent adult.
MS, CFP®, CDFA™
About the Author
Amanda has over 30 years of financial experience. Prior to joining Mission Wealth in 2006, Amanda spent 11 years as a Vice President in Private Banking at Northern Trust Bank in Santa Barbara, working with high net worth clients and their banking, investment, and trust needs.