We can all recognize the adorable half-smile of the Gerber baby.
It has been around long enough that today’s parents and grandparents who are feeding pureed carrots to their little ones once smeared that same Gerber brand baby food in their own hair.
That longevity makes it one of the most well-known and trusted baby brands out there.
But another branch of the Gerber empire may be capitalizing on that trustworthy image. Gerber Life Insurance offers several types of life insurance coverage, the most well-known of which is the Gerber Grow-Up Plan.
The problem is that when it comes to life insurance, and particularly life insurance for children, emotion tends to trump rational financial decision-making. So how do you determine if the Gerber Grow-Up Plan is a savvy financial strategy, or just a way for the Gerber baby to part you from your hard-earned money? Here’s what you need to know before you decide to insure your children with Gerber:
Is Life Insurance for Children Even Necessary?
I will admit that I have a visceral and superstitious reaction to the idea of life insurance for children. I can’t help but think that insuring my child’s life is somehow tempting fate. After all, the primary purpose of adult life insurance is to replace lost income—and unless you’re Dakota Fanning’s parents, that’s not going to be an issue for most families.
However, there are certainly some additional factors to consider when thinking about purchasing life insurance for your children.
The average funeral costs between $6,000 and $10,000, which could be a serious financial strain on a family. Life insurance can provide families with the peace of mind that final expenses would not eat into other aspects of their budget.
However, it’s important to note that it’s relatively rare for children under age 18 to die, which is part of the reason why life insurance premiums for children are so low.
Also, many funeral homes will offer services free of charge for families who cannot afford the burial costs of losing a child. If concern over the possibility of funeral expenses is the only reason why you are considering life insurance for your children, you may find that you can do better with your money elsewhere.
Your Loss of Income
While you may not need to be concerned about losing your child’s income, your income will certainly still be necessary for your remaining family in the event of the death of a child. If you need to take time off in order to grieve and take care of your family responsibilities, an insurance benefit could help to keep your family afloat while you are not working.
Your Child’s Future Insurability
Purchasing life insurance for your young child does ensure that he will be able to get life insurance during his prime earning years, even if he has a health problem that would otherwise exclude him from life insurance.
For instance, a friend of mine has a son who was diagnosed with Autism when he was 15 months old. Because of that diagnosis, he is considered ineligible for a child life insurance plan now, and will be ineligible for any other life insurance in the future. My friend now counsels everyone to get life insurance for their babies as early as possible—to make certain that they will be able to have at least some basic life insurance through adulthood.
One last selling point that many infant life insurance policies make is the fact that the permanent whole life plan makes for a good investment. According to the literature from Gerber Life and any number of other companies, the policy will build cash value, which can be borrowed against if needed, and cashed in entirely for college or other expenses once your child reaches adulthood.
While all of this is true, there is a good reason why most financial planners advise against permanent life insurance: It’s costly and doesn’t often provide competitive returns. Later, I’ll look specifically at the numbers for Gerber’s Grow-Up Plan to show why using it as an investment strategy is not the best use of your money.
The Nitty-Gritty on the Gerber Grow-Up Plan
The packet of information Gerber sends out to new parents focuses on the affordability of their plan. According to their cover letter, you can start a $5,000 policy for your son for as little as $3.41 per month (and only $2.84 per month for a daughter). That price is for a child under one year of age, and your monthly premiums will never go up.
In addition, the coverage amount will double when your child turns 18, at no extra cost. When your child turns 21, ownership of the policy transfers to her, and she can cash it out at any time—for at least the amount paid in premiums and potentially more. Finally, the Gerber program offers your child four guaranteed opportunities to buy additional coverage as an adult at standard rates, for up to 10 times the original coverage.
So, those are the promises. But the numbers are not quite as good as the promotional literature would have you believe.
To start, the most affordable option is the $5,000 coverage, which hardly seems worth the paperwork. Unless you are simply purchasing this in order to guarantee some insurability in the future, you’d be better off putting money aside in an emergency savings account or 529 Plan.
If you were to choose the maximum coverage of $35,000, which could potentially provide your child with a reasonable amount of coverage as an adult ($350,000), you would be paying anywhere from $19.11 to $22.96 per month, if you start when your child is under a year old. (The premiums are $28.98 for a 12-year old girl and $33.74 for a 12-year old boy). At $240 per year, that’s the same or more than a healthy, non-smoking adult would pay for term life insurance—and it provides less coverage. For instance, a 35-year-old man could get a $500,000 20-year term life insurance policy for $22.70 per month.
As Chuck Jaffe of Market Watch puts it, “[The adult policy] is a lot more insurance — on someone statistically more likely to need it — for almost the same dollars.”
Gerber Insurance as an Investment
Since most of us expect our children to outlive us, children’s life insurance is often sold as a great investment vehicle. When the child reaches age 25, he can cash out the policy. Gerber does not specifically state just how much your investment will grow, just that “the plan accumulates cash value and will continue to do so as long as premiums are paid. After 25 years, the cash value is equal to or greater than 100% of premiums paid.”
But if you crunch the numbers, this is not nearly the good deal that Gerber is advertising. Supposing I were to buy a $35,000 policy for my now 2-year-old son. I would pay $24.50 per month for the next 25 years before he could cash out, meaning I’d pay $7350 total in premiums. Even if my investment doubles, my child would only have $14,700 when he turns 27. If I were to invest that same amount of money each month into a mutual fund with 8% return (which is fairly modest), the money would be worth $23,635.
There’s a reason why insurance is not an investment.
Protecting Your Child’s Future
When it comes down to it, Gerber Grow-Up Plan is expensive and unnecessary. Even if you have reason to be concerned about your child’s future insurability, or your family’s ability to financially recover from a child’s death, there are other, better options than Gerber’s. For instance, you can purchase a children’s protection rider on your own life insurance for that peace of mind. According to Gordon Powers of MSN Money,
“Many such riders offer coverage that are convertible into insurance for the child once he or she reaches a certain age (the exact features of the plan again vary by company).
In general, until they turn 25, the insured children can convert their riders into permanent insurance for up to as much as five times you’ve covered them for – with no medical exam.
A rider like this doesn’t cost that much and it effectively guarantees that your children can gain access to life insurance when they’re older, regardless of their health.”
Rather than fill out the handy-dandy form with the smiling Gerber baby on it, you’ll do much better for your children to look into a protective rider on your own life insurance and to invest the money you’d otherwise be sending to Gerber in a 529 Plan or Mutual Fund.
Your kids will thank you for encouraging Gerber to stick to making mushy food.
What’s your take? Is the Gerber Grow Up Plan, or any life insurance product for kids, a good idea? Do you have any?
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