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Hey Gerber, Grow Up!

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.

How Grandparents Can Help Saving For College

Did you know that $14,000 could pay for a $100,000 college education?

It’s true. If you invested $14k the day a child was born, assuming 11% return, it would be work over $100k by the time the child enters college. Unfortunately, a young couple with a new baby (and subsequent hospital bills) is rarely ready to chunk all that money toward college.

A recent study found that two-thirds of American grandparents provided financial support to their grandchildren during the past 5 years.

The average amount given over that time period was $8,661, and 25 percent increased giving as the economic downturn unfolded.

A recent article provides us with 4 options for Mimi & Pop-Pop to cover school:

Section 529 college savings plan. This 14-year-old educational investment vehicle, named after the Internal Revenue Code that created it, is administered at the state level, although a student may use the funds anywhere in the country. The popular plan enables investors to choose from a menu of mutual funds, much like an IRA or 401(k) plan. The parent retains full control of the fund, which is revocable. Anyone may contribute and there is no age restriction on a 529 plan.

    I would give this plan as an A- plan.

    Section 529 prepaid plan. Many states and public colleges and universities offer the option to prepay all or part of the cost of an in-state public college education. An Independent 529 Plan offers a similar program for private colleges. The return on investment will usually decrease should the recipient attend school out of state or choose a different college.

      The return on these plans do not measure up to the market. Thus, I would give these plans a D.

      Coverdell education savings account. Think of Coverdell as an educational Roth IRA, although its annual limit of $2,000 per child and parental income limits make it an awkward fit for some families. The parent typically acts as custodian for this irrevocable fund; investment options may include mutual funds and/or individual stocks and bonds. On the plus side, the fund can be tapped for certain K-12 expenses. On the minus side, K-12 flexibility will expire — and contribution limits will drop to $500 annually — in 2010 unless Congress extends them. Coverdell contributions end when the recipient turns 18 and must be withdrawn by age 30 to avoid fees and penalties.

        ESA’s are fairly new products, but are the best option for college savings. If it were not for their contribution limits, they would be an A+ option.

        UGMA/UTMA. This supercharged, modern-day equivalent of a grandchild’s savings account was made possible by the Uniform Gifts to Minors Act, or UGMA, of 1956 and the Uniform Transfer to Minors Act, or UTMA, of 1986. It essentially allows donors to give or transfer assets into a custodial account for a minor without creating a trust.

          The UTMA is a great choice if the grandparents can just write a check for college. If circumstances permit, the UTMA route is an A choice.

          In the end, any college savings plan outweighs not saving for college. But choosing the proper plan can mean thousands of dollars in tax savings and inversely increased savings.

          Article | College savings options for grandparents.
          Photo | Beverly & Pack

          Interactive Game To Teach Kids About Marketing, ID Theft, & Scams

          You Are Here is a fantastic site, sponsored by the FTC, designed to train your kids to be savy consumers. The site discusses general marketing concepts, identity theft, and various advertising scams. By understanding how they are being marketed to, kids can remove themselves from the emotion of the moment, allowing parents to provide teachable moments for their children.

          The game revolves around situations you encounter while walking around the mall. As I was just playing, I was walking through the digital mall when I encountered a cell phone kiosk. While I was there, the kiosk worker explained how they advertise certain cell phones outside certain stores in the mall, to target the people who shop at that store. The kiosk worker then walked me through a matching game, where I matched the phones with the appropriate stores.

          The site is designed for kids in 5th – 8th grade.

          Article | Consumer Reports Money & Shopping Blog: Training kids to spot scams, ID theft and ad gimmicks
          Photo | Pink Sherbet Photography