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:
- 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.
- Second, let’s compare this policy against comparable investing:
- 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).
- 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.
- 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.