An intergenerational approach

Much of the financial advice given to baby boomers and increasingly Generation Xers has traditionally focused on retirement planning and the appropriate level of income in retirement, as well as wealth protection through life insurance. Regrettably, there has been little focus on how this retirement planning could be affected following the death or disability of an adult child. It is important for parents to consider what would happen if their adult child, who may be working full-time or studying and working part-time, becomes totally and permanently disabled.

Imagine this. Nathan, aged 24, who completed his tertiary studies and has recently begun his first job, is seriously injured in a car accident. Obviously, Nathan’s parents will want to provide for their son in every way possible.

However, without Nathan having adequate insurance cover (both life and health insurance), the financial burden will fall on his parents, and could have a substantial impact on their retirement savings.

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[1].

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[2]. And the average loan size for all owner-occupied housing commitments in Australia in January 2015 was $346,600[3].

Possible solutions

Advisers should take an intergenerational approach with their baby-boomer clients. 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?

Discuss the possible impact on the clients’ 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?

Point out the advantages of taking out insurances for younger people. If your clients had or still have insurance cover, they will appreciate that life insurance for younger people will be considerably cheaper (based on stepped premiums) and easier to put in place.

The same approach would apply to adult children living in the parental home, who do not have their own families. Are these children employed and paying board? Could this board go towards funding life insurance premiums?

The discussions could lead to a comprehensive insurance strategy for adult children, partially or fully funded by the parents, protecting not only the adult children but also safeguarding the retirement plans of the parents. At the very least, it would result in the children examining their vulnerabilities and options in this regard.

To further examine the need for such discussions, 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[4]. Most have lived out of the parental home and returned, many with their own young children[5]. 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.

[1] ABS: 4211.0 - Education and Training Newsletter, October 2012

[2] AMP. NATSEM Income and Wealth Report Issue 33, May 2013: The cost of raising children in Australia

[3] ABS: 5609.0 – Housing Finance, Australia, January 2015

[4] ABS: 4102.0 - Australian Social Trends, April 2013

[5] McCrindle Research: Generation Y: The Casuals, The Downagers, and the Boomerang Kids, 2009

Alex Koodrin is national technical manager at CommInsure