Of Kids and Coverage

Children impact our lives in so many ways … far too many to count. But one common thread in almost all the changes they bring is that they rarely make things simpler. Their affect on your personal protection program is no exception.

As our children, in particular as adolescents and young adults, start on their respective paths to independence, they bring with them a whole host of challenges. Among these are many and varied insurance issues. Some are not such big deals, but a misstep in the wrong area can result in devastating financial consequences. One of these critical areas is your auto insurance.

When most children celebrate their 16th birthday, the biggest thing on their minds is getting their driving permit. Although your exposure to liability shoots through the roof when your teenager starts to drive, the good news is that the period of time when your child operates your vehicle with a learner's permit is free, meaning that your current auto insurance covers the new driver.

This is one of those rare situations where an insurance company will actually give you something for nothing. Hard to believe, I know, but don't celebrate yet, because the day is coming when your child passes the driving test and actually becomes a licensed driver. That is the day when you are obligated to report the young driver to your insurance company, and that change will undoubtedly result in your paying increased premiums.

This is a time when you're going to have some decisions to make. The simplest step is to add your child as a driver on your policy. Another option is to put the title to a car in your child's name and have him or her purchase a separate policy. Each option has its pros and cons, so let's walk through some scenarios.

If you opt to add your child as a driver to your policy, how the insurance company rates this exposure depends on how many autos you have and how many drivers. If adding the young driver gives you a total of three drivers and you have only two cars, your child is usually rated as an "occasional" operator, and therefore gets a reduced rate. If, however, you have three vehicles and three drivers, your child will be rated as a "primary" operator at full premiums. In either situation, not only do you pay a higher rate due to your child's age, but also a surcharge due to her or his inexperience (less than three years of driving).

This is where it gets interesting, and some strategy comes into play. An occasional operator gets rated on the most expensive vehicle (regardless of which one she may drive). Typically, this is the newer car and the one with full coverage, and the surcharge for inexperience gets split between the two highest rated vehicles. As a primary operator, however, you may designate which vehicle your child will drive the most, and if this happens to be an older model with just liability coverage, you may find that having your child rated as "primary" on a third vehicle could end up costing less than "occasional" with only two vehicles.

The other option is to title a vehicle in the child's name and have him get his own policy. This is normally a bit more expensive, so why would anyone consider this option? Well, statistics show that youthful drivers have more accidents. Common sense, right? The question is, are you prepared to have your child's accident on your policy? Or, would you prefer to have him develop his own driving record, and with it bear the responsibility for his own actions? This also provides a layer of insulation between your youthful driver and your assets, your insurability, and the potential for accident surcharges on your policy.

Regardless of how you decide to cover your young driver, one of the most important things to consider is having the "car talk" with your child. A good agent can help here, by relaying the common mistakes young drivers often make due to their inexperience … driving too fast, distracted driving, allowing other drivers behind the wheel or swerving out of their lane to avoid small animals. Combine that kind of talk with a mutually agreed upon "contract" to maintain his driving privileges, and you've gone a long way to getting your young driver off on the right pedal.

There are also some additional discounts to be on the lookout for. Driver training discounts are available if your child has taken and passed both the classroom and behind-the-wheel driving training courses. Many public schools have stopped providing behind-the-wheel training, so you may have to seek this training outside your school. Many insurance companies also offer "good-student" discounts if you can show a recent report card with above average grades. The discount for driver training can be significant, while the good-student discount is much smaller.

Another critical step is to check to be sure that you have adequate limits of liability coverage. As I've mentioned in previous articles, liability limits should be at $500,000 as a minimum. A personal umbrella for $1 million on top of that is a very wise investment, especially with the increased exposure of an inexperienced driver in the household.

Another point worth mentioning is that rates may change again when your child is off to college. If your child is away at a school over 100 miles from home, and without the car, she may qualify for a reduced rate. If she takes the car with her, you are obligated to report the new address to the insurance company, as auto insurance rates can vary by territory based on where the vehicle is kept or garaged.

A separation or divorce between parents can make things a bit more complicated. The personal auto policy bases "who is an insured" on family members "in the household". When mother and father are living separately but have joint custody, who's household is a child considered to be in? That's a tricky question, but the consensus is that the young driver should be rated on whichever policy is considered to be his "primary" residence. Company underwriters seem to agree that as long as the child is being charged for somewhere, there should not be an issue if he happens to be driving a vehicle owned by the other parent.

Children certainly make life interesting. When it comes to making sure you have the right protection in place to avoid an unpleasant financial surprise, there is no substitute for caring, face-to-face advice from a good independent agent. In a future article we'll review how children can impact homeowners and health insurance. Until then, stay covered!