It is an exciting milestone when your child graduates from college and lands her first job. As she becomes independent, her list of responsibilities will grow to include a home of her own, perhaps a spouse and children and maybe a business and employees.
At Brown Brothers Harriman (BBH), we do not sell insurance, but we do believe insurance can be an important part of a well-executed financial plan, especially at a young age, as it protects against unpredictable events such as illness, injury, accidents or lawsuits. We asked Erin Ardleigh, founder of Dynama Insurance, to highlight some key tips when buying insurance and what types of insurance your child should consider in her 20s and 30s.
Health Insurance: Once your child has a full-time job, she will likely be offered health insurance by her employer. You can keep her on your plan if needed until age 29 (children may stay on their parents’ plans until age 26, and then through age 29 using COBRA). High-deductible plans are good options to provide less expensive coverage for young, healthy people.
Life Insurance: If your child has debt, such as student loans, or family members who depend on her income, such as a spouse or children, she should have life insurance. There are two types: term insurance, which lasts for a specific term (e.g., 20 years), and permanent insurance, which can last a lifetime. For most young adults, an inexpensive term policy usually makes the most sense.
Disability Insurance: Once your child has a job, disability insurance is essential. It will replace her income if she is unable to work for an extended period of time. Some employers offer group disability insurance; however, it is always important to review the group coverage with an independent expert and compare it with the benefits of an individual policy. An individual policy may be more expensive, but it will often provide much stronger coverage and be portable from job to job.
Liability Insurance: If your child is a professional or business owner, it is important that she protects herself against possible lawsuits through commercial, business and/or professional liability insurance. By maintaining adequate limits on the business side as well as the personal side, it is possible to create a firewall between the two, ensuring that one can never jeopardize the other’s assets. Professional organizations often have discounted premiums for their members. Review their offering with an independent broker to make sure the coverage is comprehensive.
Excess Liability Insurance (Renters, Home, Auto): Initially, your child may not have many tangible assets that need to be insured. The one main exposure that will exist is liability. Whether your child plans to rent or own a home, have a car or not, there are certain exposures that should be addressed to ensure that adequate liability limits are available in the event of an incident. Relying on primary insurance to cover liability incidents related to these concerns will usually leave significant coverage gaps. Excess liability policies from carriers that specialize in high-net-worth clients provide many additional coverages that other policies do not, including the following:
- Uninsured/underinsured motorist coverage: This helps when the other party’s insurance cannot fully compensate you as it should.
- Defense costs outside the policy limits: Liability lawsuits can drag on for months or even years, accruing large legal bills. If defense costs were included within policy limits, your protection could erode quickly and leave you with hefty out-of-pocket expenses.
- Worldwide coverage: This provides coverage no matter where an incident occurs. Global resources can facilitate claims while abroad.
- Large limits: Limits of up to $100 million are available.
Tips for Buying Insurance
Get unbiased advice. An independent broker that represents multiple insurance companies has loyalty to you and your child (rather than to a particular insurance company) and can help her compare different companies’ products. Searching online or contacting individual companies is not necessary – a good broker will know which companies to approach, saving your child time and energy.
Compare prices. Prices vary widely from one insurer to the next. Your child should make sure she receives quotes from at least three different insurance companies.
Compare products. For example, if your child is considering buying term life insurance, she should ask her broker to compare 20-year term with 30-year term. If she is buying permanent life insurance, she might compare universal life with whole life. Each product has strengths and weaknesses – she should make sure she understands the differences.
Diversify. No one company has the best price for every product. Your child will get better coverage for lower premiums if she seeks out the best product for each insurance need, rather than buying multiple products from the same insurer.
Plan for the future. It is wise to design an insurance plan with an eye toward future needs. Life and disability policy premiums are based on age and health, so it might make sense for your child to lock in a minimum amount of coverage while she is young and healthy. She should look for products that offer guaranteed premiums so that she can plan her budget for many years ahead. With disability insurance, she should look for a policy that allows her to increase the benefit as her income grows.
Review regularly. Your child should have her insurance broker and BBH advisor review her policies every year or two or when she experiences a life change. Her family obligations, finances and goals will change over time, and so will her insurance needs.