Child on auto policy? What to know

YOUR MONEY ADVISER

BY ANN CARRNS

The New York Times

Car insurance is expensive, and insuring young adult drivers adds to the cost. But families do have options to manage the burden.

Unlike health insurance, a parent’s auto insurance policy has no required age cutoff for children. (The Affordable Care Act allows children to remain on a parent’s health plan until age 26. After that, they must have separate coverage.)

"It’s not an age question," said Mark Friedlander, a spokesperson for the Insurance Information Institute, an industry group. Rather, young drivers’ circumstances, such as where they live or whether they are students, come into play when considering separate coverage.

Douglas Heller, director of insurance at the Consumer Federation of America, an association of nonprofit consumer advocacy groups, agreed that there was no blanket answer. "It’s more situationally specific," he said. The question has been cropping up more often: A growing number of young adults live at home with their parents as they confront higher living costs and struggle to pay their student loans.

Here’s what to know, in general, about insurance for young adult drivers. Some details may vary by state and carrier, experts said, so it’s always best to confer with your insurance agent.

WHY ARE INSURANCE RATES HIGHER FOR YOUNGER DRIVERS?

Drivers in their teens and early 20s have less experience behind the wheel and are at a higher risk for serious accidents.

That is why insurance premiums are highest for drivers in those age groups and generally become more affordable by age 25, said Julia Taliesin, an economic analyst with Insurify, a rate comparison and shopping site.

Inclusion on a family’s policy is often the most affordable option for young adult drivers, she said, because they can benefit from their parents’ lower risk rating and potentially from other factors, like their parents’ stronger credit history. (Most insurers consider credit-based scores when setting auto rates, arguing that they correlate with the likelihood of filing a claim. Seven states bar or restrict the practice.)

The average monthly premium for two parents with two cars that carry full coverage — liability, collision and comprehensive — is $243, according to Insurify data. Adding a 20-year-old who lives in the home to the policy increases the premium by an average of $210, to $453.

But if a 20-year-old had a separate policy, the average stand-alone premium would be $311.

WHAT IF A CHILD IS A STUDENT?

Students living at home are generally eligible for coverage under their parents’ car insurance policy. Typically, all licensed drivers 16 or older living in a household are listed on the policy. It’s the policyholder’s responsibility to notify the insurer of eligible family members.

One possible exception: If the students are living at home and buy their own car and title it in their name, some insurers may require a separate policy unless a parent is added as a co-owner, Friedlander said.

If those students go away to college and take one of the parents’ cars with them, they are still considered a member of the household and can remain on their parents’ policy. That includes students attending graduate school — even extended programs, Fried-lander said. "You could have a 40-year-old in the house" who is covered by the family policy, he said.

Students who don’t take a car with them to campus can also remain on the parents’ policy. "They come home for holidays and during the summer," Friedlander said, and are covered during those periodic visits.

ARE THERE DISCOUNTS FOR STUDENTS LIVING ON CAMPUS?

Yes. Families should ask their insurer if they are eligible for a so-called away at school discount if their child goes to college without a car, said Marguerita Cheng, a certified financial planner in Gaithersburg, Md., and a parent. Because those students won’t be driving the car much, their families qualify for a lower premium. Often, however, insurers offer the discount only if the student is attending a school at least 100 miles away from home, she said. Another option, with potentially greater savings, is formally excluding the students from the family policy while they are away, Heller said. But the catch is that parents must remember to add the students back to the policy when they return home. Heller does this for a son who is in college and sets a reminder in his phone to add him when he returns home, he said.

WHEN SHOULD YOU CONSIDER A SEPARATE POLICY?

Once children graduate, move out of the family home and take a car to a new, permanent address, "they should get their own policy," said Robert Pass-more, department vice president of personal lines at the American Property Casualty Insurance Association, an industry group.

That’s because the location where the car is kept is an important factor in setting insurance premiums, he said.

If the child moves to a more densely populated area where insurance costs are higher, it may be tempting to leave him or her on the family policy to avoid higher premiums at the new location. But there may be problems if a claim is filed and it becomes clear the car is housed elsewhere. "You can be canceled," Passmore said.

If the car is owned by a parent, it doesn’t necessarily have to be retitled in the adult child’s name, Passmore said. But doing so can help simplify things in the event of a claim. "If the car is totaled and in the parent’s name," he said, "you have to sign all the paperwork."

WHEN SHOULD I TALK ABOUT INSURANCE COSTS WITH MY CHILD?

Families should speak with their children about auto insurance as soon as they get a license, said Christina Wing, a senior lecturer at Harvard Business School and author of "Unspeakable," a guide to discussing sensitive subjects, including money. Parents, she said, can show their children the cost of adding them to their policy and explain that, while they are picking up the tab for now, eventually the child may be asked to contribute. Parents can also set criteria for when their children go on their own insurance — ideally well in advance, so it doesn’t come as a surprise. "I never think you should just take it away," she said. "It’s about readiness, not age." Scott Glasgow, executive director of FinMango, a nonprofit that promotes financial health among young adults and vulnerable communities, said parents might face their own financial pressures and need the child to help pay for coverage. "Parents can be squeezed as well," he said.

Anthony Schilt, 24, a capital finance specialist in Columbus, Ohio, said his parents had him start paying his share of their car insurance policy — about $80 a month — when he was 18. He made the payments with income from various jobs, including one at a grocery store.

Schilt said he was thankful that his parents had given him the chance to start paying the premium to them first, rather than having to manage a separate policy on his own. "It helped me practice paying the bill," he said.

After he was involved in an accident on an icy road when he was 19, he said, his parents’ policy premium jumped, and they decided he should obtain his own coverage — a decision he said he had supported.

"I think the transition for young adults should be based on a trigger, not a birthday," Schilt said. He gave examples like when children move into their own apartments or save enough money to cover the auto policy’s deductible and two months of premiums.

This article originally appeared in The New York Times.

Unlike health insurance, a parent’s auto policy has no age limit on when a child has to be removed. But it’s good to know the options.

THOMAS FUCHS — THE NEW YORK TIMES

Distributed by Newsbank, inc.