Financial independence for young adults: establishing your own insurance

What financial independence looks like and when you achieve it depends on who you ask. At a time when the costs of basic necessities like car insurance and housing are at an all-time high, Bankrate’s Financial Independence Survey found that 51 percent of parents of adult children say they have sacrificed their emergency savings to help their kids financially.

The rules for being independent and building wealth are in flux. Understanding financial literacy and having suitable types of insurance can help young adults protect their assets and future earnings, which is an essential step in becoming financially independent.

What is financial independence for young adults?

To some, financial independence is the ability to financially support oneself without outside assistance from family and friends. Others say it’s about creating enough sustainable wealth through investments and passive income that their day jobs become optional or non-existent.

Bankrate’s Financial Freedom Survey uncovered that, on average, Gen Zers say they need an annual income of $193,000 to feel financially secure. To help achieve these goals, 58 percent of Gen Zers turn to family and friends for financial advice.

But in the digital age, getting financial advice from social media has become popular among Millennials and Gen Zers, as well. The same Bankrate survey found that 49 percent of Gen Zers and 43 percent of Millenials got advice from various social media platforms.

Katie Gatti Tassin, a popular financial podcaster and creator of Money With Katie, makes it clear that financial literacy is essential for everyone. However, true investment and tax advice should come from a certified financial planner (CFP) who understands your particular financial situation. When asked for her take on financial independence, Tassin said:

Gatti also said, “While that process usually takes decades, simply being on the path — and designing your life in such a way that you’re making progress toward that goal — creates an unbelievable amount of freedom and flexibility.”

Financial freedom requires the commitment to grow your level of financial literacy and adapt your money strategy as the economy changes. It also involves reframing how you think about saving money vs. investing money. To that end, several types of insurance can help you protect your current investments and future financial independence.

Why is insurance important for financial independence?

Insurance is a way of transferring financial risk. In exchange for the policy premium you pay, the insurance company assumes the economic burden of loss beyond the agreed-upon deductible. Young adults may not have many physical assets to protect yet, but their future earning potential, retirement plans and 401(k)s can be in jeopardy without suitable types of insurance.

Gatti said, “I like to think of insurance as something that protects your downside. It’s not an investment — it ensures that catastrophic loss doesn’t threaten your investments.

Car insurance for young adults

When asked at what age a person should start paying for bills on their own, Bankrate’s Financial Independence Survey found that Baby Boomers think a person should start paying for their own car insurance at age 19, on average. Gen Zers think age 22 is more appropriate. However, car insurance companies consider drivers under the age of 25 as youthful operators who are considered high-risk — and charge them far more to compensate. This discrepancy between societal expectations and the reality of car insurance premiums for younger drivers may be undermining some young adults’ financial plans.

What should you know when choosing car insurance?

Teens and young adult drivers are more likely to be involved in car crashes since they don’t have the same experience behind the wheel as older drivers. Most states allow car insurance companies to factor in a driver’s age and years of driving experience when calculating rates. Since drivers under 25 typically have much higher car insurance premiums than other age groups, it usually benefits young adults to remain on their parents’ auto insurance policies for as long as possible instead of getting their own.

Regardless, the best car insurance for young adults is a policy that meets their needs while being affordable. As a stepping stone toward financial independence, this can mean buying an older car, as these types of vehicles typically demand lower premiums and don’t require collision coverage. Also, forgoing extras like rental car reimbursement or roadside assistance can help keep premiums in check. There are also discounts geared toward drivers under the age of 25 — such as safe driving discounts and good student discounts — that could be worth looking into.

Young adults who live on their own

If you no longer live with your parents, you will be the named insured on your car insurance policy. For states where allowed, rating factors such as age, driving experience and credit history will be based primarily on your information. The difference in premiums between a new driver and one with experience is staggering. On average, an 18-year-old on their own policy pays $6,488 per year for full coverage car insurance, which is 180 percent more than a 40-year-old driver with the same level of coverage.

Young adults who live with their parents

However, if you still live at home, you can be listed as an active driver on your parents’ policy instead. While their policy premium will still increase, the benefits of your parents’ driving history and credit will help keep the premium down. The cost of adding an 18-year-old to their parents’ policy is $4,258 — 38 percent less than an 18-year-old on their own.

While remaining on your parents’ car insurance policy may seem like the opposite of financial independence, it doesn’t have to be. Your parent’s insurance company can determine how much you cost per policy term when added as a driver. You can pay your parents or pay the insurance company your portion directly. This step toward independence allows your parents to help you financially without chipping away at their budget.

Home or renters insurance for young adults

Bankrate’s Financial Independence Survey also shows that opinions vary regarding what age someone should start paying for housing costs. On average, Baby Boomers and Gen Xers agree on age 21 while Millennials say 22 and Gen Zers say 23. Considering the rising cost of existing homes and that the average cost of home insurance is $2,151 per year for $300,000 in dwelling coverage, many young adults eager for homeownership may be stuck renting for now.

When speaking with Greg McBride, CFA, about this topic, he said:

McBride also stated, “After all, the career advancement and higher earnings potential is what will ultimately position you for homeownership when you deem the time is right.”

What should you know when choosing renters insurance?

Many people are deciding that renting fits into their lifestyle better since they don’t have to worry about paying for high homeowners insurance, property tax or home maintenance. According to McBride, “Homeownership isn’t the only way to build wealth. As a renter, you can build wealth very effectively by contributing to retirement accounts, building emergency savings and investing in low-cost index funds. In fact, that disciplined savings habit increases the odds of success when you eventually become a homeowner.”

For those who decided to rent over buying, renters insurance can be an affordable way to safeguard your financial future. In the event of a fire or other covered claim, it can help pay to replace your personal property just like a home insurance policy would.

Additionally, renters insurance also comes with different levels of personal liability. If you are liable for causing bodily harm or damage to someone else’s property, this coverage helps with legal expenses.

What’s more, if you are renting with the intent of purchasing a home later, some insurance providers offer a discount on home insurance if you have had continuous renters insurance coverage for a certain amount of time.

What should you know when choosing home insurance?

Homeowners insurance is vital to protecting your financial interest. In the event of a catastrophic loss, you will still owe the mortgage company the remaining balance of your home loan, even if the site is no longer inhabitable. Even relatively minor incidents like a kitchen fire can cause tens of thousands of dollars in damage that would significantly impact your financial health if you had to pay repair costs out of pocket.

Your mortgage company will require your dwelling coverage to be maintained at a certain level. Still, you should review your policy to make sure the rest of the coverage is sufficient for you. Here are some questions to ask your insurance agent that can help them create the best home insurance policy for your financial needs:

• Does your personal property include replacement cost coverage?

• Is your personal liability coverage higher than your dwelling coverage?

• Does your policy include an inflation guard?

• Is your home prone to damage that is excluded from the policy, such as flooding or earthquakes?

Life insurance for young adults

Gen Zers are currently between 12 and 27 years old. This means some young adults are proud parents of a Gen Alpha or two. Once you start building assets and taking on debt, buying a life insurance policy is a crucial step in financial security — maybe not for you personally, but it can help your dependents take care of financial obligations if you were to pass away unexpectedly.

What should you know when choosing life insurance?

When determining how much life insurance you may need and what kind of policy to purchase, remember that your needs with regard to this type of insurance may change with time. Some people start off with a group life insurance policy offered by their employer but may want to consider adding an additional policy when they can afford it. The younger you are when you purchase a life insurance policy, the cheaper it may be over the long term.

According to Bankrate analyst Natasha Cornelius, CLU, “Young adults who have a family or want to should consider term life insurance to protect their partner’s financial future, especially if children are part of the plan.”

Term life insurance is an extremely cheap life insurance option when you’re young and healthy. For example, a 24-year-old could get $250K in term insurance that lasts 30 years for under $20 per month. This gives your partner and children peace of mind and can help keep financial independence goals on course.

Other types of insurance and what to consider

Bankrate’s Personal Finances Outlook Survey found that 86 percent of Americans have at least one financial goal for 2024 and 37 percent say their finances will improve this year. While spending money may feel counterintuitive when trying to reach your goals, there are additional insurance products that can help you build and protect your financial future.

Health insurance

Bankrate’s Financial Independence Survey found that on average, American adults feel that people should start paying for their own health insurance at age 23, but many job-based insurance plans will allow you to stay on your parents’ plan until you turn 26. Sudden medical bills can derail your goals, so instead of going uninsured, look into state-sponsored health plans or review high-deductible options if you don’t have insurance through work or your parents.

Business insurance

If you start your own business, there are additional liability risks to consider, ranging from loss of inventory to slip-and-fall lawsuits. Many home insurance companies offer a business owner’s policy to cover potential losses.

Rideshare insurance

According to Bankrate’s Side Hustle Survey, 39 percent of adult Americans have a side hustle to make ends meet or to help conquer financial goals. Of this 39 percent, 53 percent are Gen Zers. If you drive for Uber or an app-based food delivery service, you should consider adding rideshare coverage to your auto policy.

Home share or landlord insurance

Homeowners who have rental properties or participate in home-sharing may want to look for a carrier that offers a home-sharing endorsement or dwelling policies. If you live in a multi-family home and rent the additional units, your HO-3 will typically be the appropriate policy. If you don’t live in the home, then a fire-dwelling policy may be more applicable.

Umbrella Insurance

Umbrella insurance adds another level of protection on top of your auto and home insurance. Coverage usually starts at $1 million and can provide liability protection against slander and defamation, something young adults may need in a social media-driven world.

Frequently asked questions

• • What questions should young adults ask themselves when making decisions about getting insurance?The main question to ask yourself when getting any type of insurance is, “Does this policy help protect or promote my financial future?” Paying for coverage you don’t need can delay your financial goals, so work with an experienced insurance agent to ensure you aren’t over- or underinsured. Keep in mind that insurance needs will change depending on your life stage, too. Revisit your coverage selections often — anytime you have a significant life event, such as buying a car, buying a house, getting a promotion or having a baby.

  • How long can you stay on your parents’ car insurance?You can typically stay on your parents’ insurance policy for as long as you live in the same household. Even if you purchase a vehicle in your own name, most private passenger auto policies allow the named insured to add immediate family members residing in the home and their vehicle to the policy. Once you are no longer a dependent and move out of the home, you will likely need to secure your own auto insurance policy.

  • Why should financially independent individuals consider life insurance?Once you start accruing debt or when others depend on you financially, consider getting life insurance. Even if you live at home, if you die unexpectedly, your parents will need to pay for funeral expenses and may be on the hook for outstanding car loans, student loans or credit card debt. When you take on a mortgage, having life insurance can help ensure your partner and/or children avoid losing their home should you pass away. Think of life insurance as a way to help prevent your death from becoming financially burdensome to your loved ones.