Are you a parent planning to buy your student a car as a graduation gift? Lucky student! But the sticker price of the car isn’t all you have to worry about – you also need to consider how much that car may cost to insure. The answer to the insurance billing dilemma depends on whether your college student qualifies to stay on your insurance policy – and whether you want the responsibility and extra cost.
5 insurance scenarios to consider before giving your kid a new car
Scenario 1: Driving the car home from the dealership.
You're driving the car home before placing the big bow on top of the vehicle. Do you need insurance yet, and under whose name? Generally, parents purchase the car with joint ownership. This means both the parent and the child own the car, says Bill Collier, Nevada Independent Insurance Agents representative and licensed insurance agent. The dealer will require proof of insurance before the car is driven off the lot.
If the vehicle is jointly in the parents' and child's names, then the car will generally be put on the parents’ policy by the insurer for 15 to 30 days, whether the student lives at home or not, and depending on the state or insurance carrier, Collier says. Parents should call their insurance agent to inform them about the new purchase.
Scenario 2: High school and college graduates living at home.
If your high school graduate stays at home for the summer or plans to attend a local college and commute, it's a good idea to keep him or her on your policy. According to Bob Ricketts, president of Ricketts and Associates Inc., an insurance company in Idaho, you are liable for any car that is parked on your property – and that includes your graduate’s.
If a college graduate is living at home, he may be covered because all people living in one household can be covered by the same policy. However, the insurance company may suggest a separate policy if the graduate is the sole title-holder of the car.
Scenario 3: College student living in a dorm.
In this scenario, your high school graduate attends college and lives on campus. If you and your kid are on the car’s title, you can add your kid to your car insurance coverage. However, you should review your policy for rules on "permissive use" – this is when your teen lends the car to a friend. The wording on your policy may exclude claims that arise if your graduate’s friend is driving at the time of the accident, Rickets says. For instance, if your kid’s dorm roommate borrowed his car to run an errand and got into a crash, any damages caused by the accident may not be covered.
If the vehicle is titled under your college graduate’s name, he must get his own car insurance policy.
Scenario 4: College graduate living at home.
If your college graduate lives at home, he can be covered by your policy. However, once again, your insurer may suggest a separate policy if your graduate is the sole title-holder of the car.
Scenario 5: Your college graduate landed his dream job.
Congratulations! Your graduate found a job immediately out of college and is totally independent, living in his own apartment. Unless the parents and student jointly own the car, the parents can't claim the graduate under their policy, Rickets says. At this point, since the student is independent, parents should give the car as a gift to avoid an obligation to insure the vehicle on their own policy, he says.
4 general guidelines for any parent gifting a car:
1. Double-check your policy’s wording for permissive use (who can and can’t drive the car as stated on the insurance policy). Your insurer may not cover a claim if your graduate violates the rules.
2. Remember, joint ownership doesn't have to be permanent; parents can remove their name from the car title at any time. However, it may be best to wait until your child graduates college, since individual insurance rates for a person age under 25 are typically expensive.
3. Consider purchasing an umbrella policy, ,. This is an extra policy for additional liability coverage in the event of a lawsuit. If you purchase the state-required minimum liability insurance, you may not have enough coverage and could lose your home or other assets, Collier says.
And if you’re a student with your own insurance coverage, you stand to lose a lot as well – even if you don’t have a lot of assets. If a student is found guilty in a lawsuit, a judge could rule that any amount that isn’t covered by insurance is taken as a percentage of the student’s future income. For instance, if the student is found to be at fault in an accident where someone is permanently disabled, the claim may be $500,000. However, if the student only has $100,000 in insurance coverage for liability, there is still a $400,000 gap that could be taken as a percentage of future wages.
4. Even with a clean driving record, Collier has seen rates for teenagers cost up to five times more than if they had been insured under the parents' policy. Get several insurance quotes to find out how much it would cost to purchase an individual insurance policy for your child.