Even before my oldest was born, I'd see those ads for Gerber Life Insurance and think how absurd it was. After all, children don't need life insurance because no one's depending on them - especially not term
insurance. But I recently received a solicitation for Gerber's Grow-Up Plan
, which is a whole life policy. Since we'd recently increased our own life insurance policies to provide for our new baby, I was intrigued.
A whole life
insurance policy covers you for your entire life, unlike term insurance, which only covers you for a specified period. A whole life policy also builds cash value - the insurance company takes a portion of your premium and invests it. A whole life policy is considerably more expensive than a term policy, which is why most finance experts don't
The Gerber Grow-Up Plan got my attention because the premiums start low, due to the young age of the insured, and stay the same for the duration of the policy. But when I calculated the cost of a year's premium on the maximum $35,000 policy for our two-year-old, it came to $305.76 (the monthly premium is $25.48). The policy would increase to $70,000 at age 21 and $350,000 at age 28. $305.76 per year for $350,000 of whole life coverage is a pretty darn good rate. Estimated quotes for a comparable policy from this aggregator
are all over $1200 per year. And at least one expert
feels that Gerber's rates are generally competitive.
However, the bottom line seems to be that the amount you'd pay out over the years to get to a $350K policy for just over $300 per year makes this investment a poor choice. As this Smart Money
article points out, $100,000 in today's dollars isn't going to have the same value in 30 years. Additionally, whole life policies are generally not
a good investment vehicle - in other words, the money paid for the premiums could be invested in other vehicles with a much better return.
As an example, if I were to buy a $35,000 policy at $305.76 per year for our two-year-old right now, I'll pay a total of $7949.76 over the next 26 years. Gerber doesn't say on their website how the cash value will be calculated or what the rate of return is, only that "The plan accumulates cash value and will continue to do so as long as premiums are paid. After 20 years, the cash value is equal to or greater than 100% of premiums paid." So that's a cash value of at least $8,000 after 20 years. I'm guessing this is a generous estimate, but I'll assume the money doubles in the next 6 years and that after 26 years, when our son is 28 and the policy value increases to $350,000, the cash value would be $18,000.
But if I took the $305.76 and instead of buying the whole life policy, made monthly contributions of $25.48 to a mutual fund with a conservative annual growth rate of 8%, I'd have over $26,000. If the mutual fund grew at the S&P 500's historical growth rate of 12%, I'd have over $54,000. (And I'd definitely
invest the money in an S&P 500 index fund.)
My conclusion: Gerber's Grow-Up Plan is not
worth the money.
But don't forget to take the money you might have spent on a life insurance policy for your child and invest it in a tax-advantaged education account
like a Coverdell ESA or 529 plan instead!
Labels: insurance, kids money