The adverse impact of underinsured adult children
One of the more “silent” detriments to your financial security is not so much investment markets or interest rates or in fact planned capital expenditure in your retirement years; it is somewhat more subtle than that.
The single biggest issue that we believe can undo your best laid plans is if you have an unforeseen need to assist your children, financially, “Family risk”.
A substantial percentage of adult children in Australia continue to live in the parental home. In 2011, around 29 per cent of young adults lived without a partner or child but with one or both of their parents, up from 21 per cent in 1976. Most have lived out of the parental home and returned, many with their own young children. Financial reasons are the most common cited for this phenomenon, along with housing affordability and people marrying later in life and delaying childbirth. Many parents also do not want their children to leave home, for emotional reasons and to help them get a start in life. Some of these children already have debt of their own, paying off mortgages on investment properties and living at home to save money and make this possible.
It could be that your children get married, borrow money for their dream home and have children of their own, creating financial liabilities that, unless properly protected, can have devastating financial affects on their financial and personal health.
The risks faced are numerous; we have identified some of these below:
• Loss of Job and income
• Loss of life
• Permanent incapacity (both your child, their partner or their children)
Your plan may be difficult to maintain if your children or grandchildren are affected by any number of financial or health issues that has the potential to involve you, to ensure they survive financially.
It is one thing to provide for a child with a major disability, and another to provide for a child who has a partner and children of their own, especially if they are the main breadwinner of the household, if that child were to die, become permanently disabled or suffer a critical illness.
The burden of caring for children also falls on grandparents. In 2011, 937,000 children received child care from a grandparent on a regular basis. This represented one quarter (26 per cent) of all children under the age of 12 or half (49 per cent) of those children who regularly attended some type of child care.
According to the National Centre for Social and Economic Modelling (NATSEM), the cost for a middle-income family of raising two children from birth until they leave university is around $812,000. And the average loan size for all owner-occupied housing commitments in Australia in January 2015 was $346,600.
We should take an inter-generational approach with planning for the future. Clients and advisers should talk about their adult children’s situation: do they have jobs, debt, or families of their own? Are they the main breadwinner? Do they have adequate insurance to cover liabilities and provide for their families? Have the parents guaranteed any loans? If these children have inadequate cover, are the parents prepared to assist financially in paying or partially paying premiums?
What is the possible impact on your retirement plans. What would be the effect on their retirement income if they had to allocate hundreds of dollars per week on out-of-pocket medical expenses and care costs for their adult children?