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How to use your insurance to help your adult children

Parents often help their adult children pay rent and cell phone bills. However, make sure that you're not sacrificing your own retirement account and finances to help your kids. One way to help your adult children without hurting yourself is through insurance. 

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 as a way to pay for final expenses, but it's much more than that. Life insurance is also a financial solution for those looking 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, 15 percent of people 25 to 35 live with their parents. Borrowing against your life insurance's cash value is one way to help children pay off loans, buy a home or start a business. That boost could help get to into independent living. 

However, 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. 

For example, 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're 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 can be costly. The Affordable Care Act lets parents keep their children on a health plan until 26. Keeping your children on your employer-sponsored plan will save them money. 

The average annual premiums for an employer-sponsored single plan is more than $5,000. That doesn't include the out-of-pocket costs. Your child may pay even more for an individual health insurance plan. The average cost of an individual plan can cost more than $6,000 annually. 

Your adult children could save that money by staying on your health plan. That could help them put that money toward saving for a home or future rent. 

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, assistant vice president for Farmers Insurance in Los Angeles, 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.

A parent wants to protect your children -- no matter their age. However, make sure you don't sacrifice your own finances doing so. Instead, look at these insurance options to help you children as they look at head out on their own. 

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