Hello Again Everyone!
Based upon last month’s article, I received a few questions about insurance and have chosen one to respond to this month. The below Q & A represents a question all families face at some point in their insurance lives.
Our 20-year-old son lives at home and is still covered by our car insurance. However, he is such a poor driver that I constantly worry he will be involved in a bad accident and injure someone. What effect would this have on our insurance? Do you think it is wise for us to keep him covered?”
Thank you so much for your question. This is a somewhat common concern for parents, as we all try to determine the time to unwind children from our households and our finances. However, it is a more complicated decision than one might first think. There are really a series of decisions that go into determining what to do in this scenario.
First, as a parent, are you emotionally ready, to remove the child from your somewhat more protected and premium cost beneficial policy? If the young adult remains under your overall policy, they will generally be rated in a more favorable manner, as they are being given the benefit of the doubt for your driving and insurance history. (Assuming it is a good one.) This gives them a lower premium for their coverage than they would have on their own. By removing them, they will likely pay a higher premium for similar coverage than if left on a parent’s policy. However, some companies, like Farm Bureau, will apply credits to their stand-alone policy based upon a previous good record under their parent’s policy.
Second, what is your personal insurance and risk tolerance?
If left on the parent’s policy, there remains a liability risk to the parent. An example of this would be the scenario you mention, a bad accident with a badly injured party. In this scenario, if your son is found at fault and damages are deemed payable by your son, under your policy, should the liability limits be exceeded (the cost of the accident) and he is unable to pay those damages, the injured party could and likely would come after you, the parent, to pay any remaining balances owed. The assets which could be deemed available to use, in payment of these liabilities, would include any personal assets you may have, including your home. There are cases of parents being forced into personal bankruptcy from a child’s automobile accident; they are both real and true.
If you want to keep the child on your policy but try to mitigate these risks, you could raise the liability limits on your automobile coverage or perhaps consider an Umbrella Liability insurance policy. In this manner, you might add additional protection for both your son’s assets and more importantly, your assets. By increasing your limits, you would be decreasing the possibility that any potential claim would have to be paid by you personally. Essentially, you would transfer the risk of a potential claim payment for a greater amount of money, from you to the insurance company.
A major problem with this solution though is that you still remain main potentially liable for damages that would exceed these new higher limits, should your son become involved in an accident while on your policy. Also, your rates and coverage would still be adversely affected for years, even if your son later moves to his own policy. Depending on the severity of the accident, there really is no way to avoid the impact of a child’s accident on your insurance. In a worst case scenario, it could even lead to the cancellation of your policy by the insurance company. At a minimum, it will affect the future rates you pay. Potentially, as mentioned, if you or your son is underinsured, it could place any assets you have at risk, as well.
As an aside, if you are an individual with any amount of assets which you hope to preserve, regardless of this question about children, I would recommend you also consider an umbrella liability policy. The same risk of being found liable for damages in excess of your coverage exists for you. If your assets exceed your insurance coverage, all amounts past your coverage limits are potentially accessible to claimants in the event of a claim. Put plainly, a claim which exceeds your coverage limits will come out of your personal assets, so get liability coverage which reflects your loss potential. An Umbrella Policy can mitigate this risk and is amongst the cheapest coverage you can buy, relative to the benefits provided.
Lastly, the cleanest way to remove this risk of a child’s potential accident from your financial responsibility is to have your child both own his car and insure it solely under his name. He needs to own the car to prevent an injured party from pursuing a claim against you for liability, which would otherwise be based upon any ownership interest you might maintain in the vehicle. By owning the vehicle himself and insuring it himself, he becomes the only party with potential liability for his driving actions. The insurance coverage transfers his risk to an insurance company, up to the purchased liability limits.
If you still feel a need to help your child through the payment of the premiums on the policy, you can give them the money to pay the premium. Just be sure the policy is owned by your son and insures him and his car only. As long as you don’t co-mingle insurance or ownership of the vehicle, you should remain free of any liability, related to any potential accident he may become involved in.