Free Family Finance

The mysteries of mass mailing baffle me. Nonetheless, I received a mailing for the Gerber Grow-Up plan yesterday. My wife and I don’t have kids, don’t want kids, and generally speaking don’t like kids. But, as luck would have it, we are the target market for childrens whole-life, life insurance. Riddle me that!

If you are unfamiliar with the Gerber company, they make baby food. Additionally, for some odd reason, they sell life insurance too. Their plan is specifically marketed towards the parents & grandparents of children. Through the Gerber Grow Up plan, you can begin a whole-life life insurance policy for your child. Because the child is so young, the monthly premiums are very low (mainly because the child pays into the plan for 25+ years longer than the average participate who doesn’t look for life insurance until they are out of college).

The basic plan includes $5,000 of permanent, whole life coverage. At age 18, the coverage doubles to $10,000 and the premiums stay the same. Moving forward, as an adult you have opportunities to expand the policy for higher coverage amounts. Or, after 25 years on the plan, if the child decides to turn in the policy, they will receive a cash value amount equal to all of the premiums paid. The cash value feature seems to be the big draw to the program.

I personally think this type of insurance is a bad deal. Here is why:

1. First, why does a 2 year old need life insurance? The value of life insurance is to defer the financial risk of a death from the surviving dependents to the insurance company. Who is financially dependent on a toddler? A tween? A high school kid? That situation hardly ever exists. Thus, there is no need for life insurance. Typically speaking, an individual doesn’t have financial dependents until they are married. If you are in a dual income family, dependency might not exist until there are children. That could be 25-30 years from the day the policy is written.
2. Second, let’s compare this policy against comparable investing:
   1. For the sake of example, let’s assume Grandma & Grandpa purchase this policy for their granddaughter before she turns 1. She will keep the policy for 25 years, at which time she will realize she needs money far more than life insurance. She then cashes out the policy. Her grandparents will have paid $38.16 a year for 25 years – $954. That is the cash value of the policy when the granddaughter cashes it out. But, if Grandma & Grandpa had paid $38.16 per year in an average mutual fund, their beloved granddaughter would have over $5,000 saved at age 25 ($3.18 per month, for 25 years, at 11% interest).
   2. Let’s assume the same granddaughter does not cash out the policy at age 25. But instead keeps it. Heck, it is only $38 bucks per year. She might as well hang on to it. After all, the coverage amount doubled when she was 18. So it now provides $10,000 worth of coverage. The granddaughter keeps the policy until she is 65. At that time, she realizes that she is self insured and subsequently no longer has a need for the policy. The total contributions/cash value of the policy would be $2,480. Not bad considering it provides $10k in coverage. Right? But if she had only gone the mutual fund route…she would have over $430,000 invested ($3.18 per month, for 65 years, at 11% interest). Holy Crap.
   3. Lastly, let’s assume the policy is never cashed out. The granddaughter, who now has grandchildren of her own, passes away at the age of 88 years old, leaving her children the $10,000 life benefit. The total contributions toward the policy would be $3,358. Again, not bad for a $10,000 policy. But again, if the Gerber life insurance investment had simply been invested in mutual funds, she would leave her loved ones almost $5.4 Million dollars. Holy Crap x 10!

When contemplating the purchase of products such as the Gerber life insurance. Please Please Please consider an alternative. By avoiding the purchase of insurance when you don’t need it, buying term insurance when you do, and investing along the way, you could build substantial wealth for you & your estate.

If you are a grandparent looking to make a financial investment on behalf of your grandchild, consider a simple mutual fund investment. A basic, $1,000 one time investment for an infant, would grow to over $6.3 million dollars by the time your grandchild reaches 80 years of age. This small investment could mean a radical change in the financial health of your family tree.

One of my favorite blogs belongs to Dr. Mark J. Perry. He is a economics & finance professor at the University of Michigan. Recently, he posted a ‘quote of the day’ that gave me a chuckle. I thought I would share:

Now, let me get this straight…..We are going to pass a health care plan written by a committee whose chairman says he doesn’t understand it, passed by a Congress that hasn’t read it but exempts themselves from it, to be signed by a president that also hasn’t read it and who smokes, with funding administered by a treasury chief who didn’t pay his taxes…all to be overseen by a surgeon general who is obese, and financed by a country that’s nearly broke. What could possibly go wrong?

~Anonymous

Article | CARPE DIEM: Quote of the Day.
Photo | wellohorld

By now, you probably know about the Homebuyer Tax Credit. It came, it was successful, and it was extended. In this rendition of ‘Just The Facts’, we give you the quick & dirty concerning the Homebuyer Tax Credit extension.

• The Important Dates: The credit has been extended from November 30, 2009 until April 30, 2010. By that time you must have you new home under contract. From then, you have 60 days to close on the property, which gives you until June 30th to seal the deal.
• The Important Numbers: For first-time homebuyers, the credit computes to 10% of the purchase price of your home, with a maximum credit of $8,000. So if you buy a $70,000 home, you will only get a $7,000 credit. The same is true for ‘non-first-time homebuyers’, except they have a maximum credit amount of $6,500. This is a new twist to the credit, as current homeowners were excluded in the original credit.
• The Important People: If the timing is right, this tax credit could afford you with a wonderful opportunity. However, to make the most of the opportunity, you need to be working with quality professionals. Here are a few important people to surround yourself with: a CPA (to make the proper tax steps), a Mortgage Lender (to ensure you are getting the best rate on the most applicable loan), a Realtor (to see that you are getting a good deal on a home – after all, it is a buyers market), a Home Inspector (to ensure you are buying the home you think you are buying), and an Insurance Broker (to be certain your largest asset and its contents are protected).
• The Important Catch: Out the sudden influx of new homebuyers, there has grown a strong presence of fraud. As a homebuyer, educate yourself. If anything seems fishing, seek a second opinion. When dealing with each of the previously mentioned professionals, ask them for recommendations for the other role players. Without a lot of work, you can discover the best of the best in your area.

via 4 tips for the homebuyer tax credit.