Your teen may be champing at the bit to get their learner’s permit or driver’s license, but are you prepared financially to have a new driver in the household? From liability insurance to car expenses, getting a license is about more than passing a driving test. Here are some actions to take long before your teen gets behind the wheel.
In many states, kids can get their learner’s permit when they are 15 years old. In the months preceding, reach out to your insurance agent to find out exactly when they need to be added to your auto insurance policy. Be prepared for your premium to increase significantly (the national average is a 130% jump), especially if you have a son.1
While your child’s age, gender, and inexperience with driving are what contributes to high premiums, there are ways to reduce the cost:
- Compare insurance rates among different companies.
- Carefully consider which car your teen will primarily drive. Insurance rates will be higher for a teen driving a brand-new sports car vs. a used family car.
- Ask your insurance company if they offer discounts for the following:
- Maintaining good grades.
- Participating in defensive driving courses.
- Using a monitoring app or device to track mileage and speed.
We highly recommend increasing your umbrella liability coverage in advance of adding your teenage child as a driver on your auto insurance policy. Umbrella liability insurance is a relatively inexpensive way to protect you and your assets in the event of a lawsuit. While adding a teen driver to your auto insurance policy will undoubtedly increase your umbrella insurance premiums, the benefit of having adequate coverage in place in an event of need will far outweigh the increased premium cost.
While a driver’s license legally permits a teen to drive, you as their parent ultimately determine if they have the privilege to drive. Have an honest conversation about your expectations and the responsibilities your teen will have to undertake to be allowed to drive. Bear in mind their expectations may be formed based on what they see their peers doing. Engaging in constructive discussions on the following topics before your teen earns their license can go a long way towards avoiding misunderstandings.
What car will your teen drive? Are they expecting to get their own car or are they prepared to drive the family minivan? Kids whose friends have their own cars may be assuming they will get one as well and can be shocked to learn otherwise. Use this as an opportunity to talk about the costs of buying and maintaining a car and setting long-term goals. Discuss with your child how they can earn and save money to eventually be able to buy a car on their own.
If your teen is getting a car, will it be new or used? Are they expecting a certain level of luxury based on what the rest of the family drives? Will they pay for all or part of the total cost? Here it is important to consider the wealth effect. If your child receives a brand-new, high-end car at age 16 and contributes no money, is it reasonable for them to maintain that level of luxury once they are young adults and living on their own? If they are paying for all or part of a car’s cost, discuss the value of the car and whether any upgrades they choose are worth an increased sticker price.
If your teen gets a car of their own, who will be responsible for monthly car payments? Regardless of what car your teen drives, who will pay for insurance and other expenses such as gas and regular maintenance? Does your teen have a job that enables them to reasonably pay for these expenses? If they fall behind on payments are you prepared to offer them a loan or revoke car privileges?
Obligations and Consequences
Do you plan to tie grades to car use? Do you expect your teen to drive siblings to school and events or run family errands? What are the consequences for not meeting pre-established expectations? How will you handle traffic tickets or an accident? Having mutually agreed upon accountability measures in place ahead of time can help maintain calm during what is very often an emotional time in your teen’s life.
At SageVest Wealth Management, we want to help you raise happy, well-balanced, and financially responsible teens. Teaching your children the fundamentals of financial literacy is one of the greatest gifts you can give and why we created SageVest Kids. From saving for college and enjoying family vacations to planning your retirement, please contact us to learn how we can help you focus on your family’s financial best interests.