How to use your insurance to help your adult children
If you are trying to help your adult children find their financial footing during the current recession, you're not alone.
A study recently presented at a meeting of the Population Association of America found that most young adults today are getting a monetary boost from Mom and Dad. According to the study, 62 percent of young adults receive help, and it's not just pocket change. The average amount of assistance was $12,185. The money goes for such things as college tuition, vehicle expenses and rent.
The need for young adults to lean on their parents is understandable. A recent study by the Pew Research Center found that only about 54 percent of people between ages 18 and 24 are employed. Those who are working full time have experienced a greater drop in weekly earnings -- 6 percent -- than any other age group in the past four years.
Your children may be hurting financially, but there's no reason to place your own finances in jeopardy in order to come to their aid. There are a variety of ways to use insurance policies to help them achieve financial security.
1. Create a legacy through life insurance
"Most people think life insurance is for straight death benefit protection," says Kristen Komer, a spokesperson for MetLife. "But life insurance is a great financial solution for those who want to leave a legacy."
Life insurance benefits are tax-exempt, which makes this a good way to transfer wealth from one generation to another.
2. Use a life insurance policy's cash value to provide funds
A typical permanent life insurance policy has a cash value account that grows over time. If you have such a policy, you can tap into its cash value.
According to the Pew Research Center, 39 percent of young adults ages 18 to 34 remain at home with their parents or have temporarily returned because of the tough economy. Komer says borrowing against your life insurance policy's cash value can be one way to help children pay off loans, buy a home or start a business. That can move them into independent living.
Marvin Feldman, president and CEO of the nonprofit Life and Health Insurance Foundation for Education (LIFE) in Arlington, Va., notes that while using a permanent life policy's cash value can be a great gift to children, parents should avoid putting themselves in financial jeopardy.
"The first thing they need to do is consider their own financial situation," he says. Consider whether you might need that cash value yourself.
3. Buy life insurance for your child
The main reason to buy life insurance is to replace a wage earner's income. Although it often is dismissed as unnecessary, buying a permanent life insurance policy for a young child can be beneficial, says Komer. "It's a great first start to getting them some financial security, something you should think about right away."
For example, Komer says a $20,000 policy purchased at birth may accumulate as much as $4,000 in cash value by age 18. With annual premiums often less than $200, this can be a vehicle for helping a child get cash for college or other needs.
There's a downside to borrowing against the cash value of such a policy. Not only can it reduce the amount of cash available in the future, but depending on the specific provisions of the plan, it also can reduce the death benefit.
If you are planning the gift of a life insurance policy, consider life insurance companies that offer guaranteed coverage riders that allow your children to increase their coverage level in the future without having to go through the underwriting process. This means they'll be able to buy more coverage in the future regardless of health conditions.
4. Keep an adult child on your health insurance plan
Health insurance doesn't come cheap. The Kaiser Family Foundation found the average annual cost in 2010 for single coverage on the individual market was $2,580. For that price, many young adults see health insurance as a luxury.
However, thanks to a recent change in the law, you can help them get the coverage they need. Under the Affordable Care Act, young adults up to age 26 can remain on a parent's health insurance plan. The provision applies regardless of a young adult's residence, marital status or income.
5. Let your adult child stay on your auto insurance policy
Auto insurance is a major expense for young adults, and as long as your child is still living at home, he or she probably can remain on your policy.
Insurance rates for young drivers normally are high because of their greater risk for having auto accidents. It's usually cheaper to keep a teen on the family policy rather than putting him on his own policy.
Shop around to determine which alternative is less expensive.
Marty Draper, head of personal lines for Farmers Insurance, reminds you to consider your own liability before adding a child's name to an auto insurance policy. Depending on the laws in your state as well as how the policy is set up, everyone named on the policy potentially could be liable for damages if your child causes an accident and is sued.
"Parents and the adult child need to work closely with their agent to understand the specifics of their jurisdiction and how their policy works," says Draper. For example, parents might be on the hook for damages if their child has lower limits on the policy than they do.
"The key for consumers is if you are going to add a kid to your policy, even an adult child, you need to make sure you have the proper [liability] limits," says Edie Mermelstein, a Southern California attorney who handles insurance and consumer issues.
6. Purchase long-term care insurance
Feldman says if you purchase long-term care (LTC) insurance for yourself, it will provide peace of mind for your children. It also may save them money.
"It relieves the family members from making certain difficult decisions about care," he says. "It provides a tremendous amount of freedom."
Without LTC insurance, children may have to bear the burden of paying for your care themselves. They may have to select a less-than-appropriate level of care because they can't afford anything more intensive.
Another benefit of LTC insurance is that it can shield your estate from costly medical expenses, leaving more for your children to inherit.